Book Review – Overhaul

I just finished reading the book: Overhaul – An insider’s account of the Obama administration’s emergency rescue of the auto industry, written by President Obama’s Auto Czar: Steven Rattner. Mr. Rattner prior to his appointment had been an investment banker – at Lazard and Morgan Stanley – and founder of a private equity firm: Quadrangle. His appointment as the “auto czar” was met with considerable skepticism due to his lack of auto industry experience. However, by many accounts he and his team gave a good account of themselves with the recent IPO of “new GM” being a testament to their efforts.

I enjoyed reading the book largely because of the “no holds barred” approach the author adopted in writing the book. He was quite open in heaping praises on the people he felt added a lot of value to the process and with whom he was impressed. He was also quite brave enough – or vengeful depending on who you talk to – to call out the individuals and institutions whose work and/or abilities he found wanting. The book’s conversational, first-hand account makes for a fascinating read and helps the reader develop some sort of familiarity with the central characters involved in the auto bailout. I really enjoyed reading Overhaul and I drew a number of lessons.

Outside advisers can add value. Investment bankers and management consultants like to pride themselves on the value they are able to create by helping their clients think through hard decisions. While this may be true in many cases, there are also many instances where this claim seems tenuous, especially given the number of mergers that have not turned out great. However, the auto bailouts and restructuring episode was a poster child of the value bankers and other advisers can create for their clients. Mr. Rattner and his team – affectionately termed “Team Auto” – were basically acting as a small investment banking team with a very powerful but concerned client: Uncle Sam. The auto bailouts were not really about cars or manufacturing, if it was about these things then Team Auto would have failed quite spectacularly. It was at its core a restructuring problem: GM and Chrysler had debts and other liabilities that had clearly become unstable given their current operating liabilities. Both companies’ debt burdens had to be reduced, some employee and retiree liabilities jettisoned and their operations and brands scaled down significantly. The author wrote of marathon negotiation sessions with lenders to strike debt restructuring deals and with the unions to secure concessions to ensure viability.

The US political system still works. While a lot has been said about political gridlock in the US congress with pundits constantly reminding TV audiences about how the US congress can’t seem to get things done. It was quite instructive to see that in times of deep crisis – such as the auto bailout episode – politicians find a way of working together. A politician with a free market philosophy as fervent as President Bush was basically responsible for authorizing billions of dollars of federal aid for the auto companies, a move many legislators in his own party vehemently opposed. The book even describes a scene in which Vice-President Cheney (whom no one can accuse of being a big government liberal) went up to Capitol Hill to lobby republican lawmakers on the auto bailout. It was also interesting to find out that despite some initial outcries, congressman largely allowed the rescued companies to go ahead with dealer closures even though many of their prominent constituents and campaign contributors were affected.

Sacrifice has to be broadly shared. Reading the book, it was really clear that various stakeholders had to make sacrifices and settle for outcomes that were less than ideal for them. The companies had to close some struggling brands and close some plants, lenders had to take significant haircuts on their loans while workers and retirees took a big hit on benefits. Anecdotes abound in the book about marathon negotiation sessions with labor, the bitter pills that the unions had to swallow and the personal toll that these decisions had on the president of the United Auto Workers (UAW). While some commentators have (rightfully) questioned the move to place employee and retiree benefits (unsecured creditors) above lenders who are senior creditors and explained it as a political move by the Obama administration to favor its union supporters. The book suggests that this may have been due to just plain operating reality, as the author said: “I need workers to make cars but I don’t need lenders”. So while lenders had seniority above employee liabilities in the priority structure, operating realities favored the workers. While this makes sense, I can’t help but wonder what impact this would have on future restructurings.

Success can lead to insularity and lethargy. General Motors in its heyday represented the finest of American industry, overtaking Ford Motors and its iconic Model T and instituting routines under famed CEO: Alfred Sloan that came to define management best practice. However, the picture the author painted of GM in the pre-bailout days was very far from flattering. The book was replete with anecdotes of GM management missing multiple deadlines, being unable to accurately estimate cash holdings & requirements, holding bureaucratic review meetings and even being unable to provide Team Auto with its financial model (the bankers had to improvise by building one).

In conclusion, while I agree with a lot of what has been said about the ineptitude, arrogance and lack of responsiveness of the auto companies’ managements to changing conditions. I can’t help but wonder whether the companies ended up being “punished” for their role in building America’s middle class through the very benefits and perks which ultimately rendered them uncompetitive. Getting a job on GM’s assembly line in its heyday was a ticket to a middle class life with good wages and a robust package of healthcare and other benefits. People paid off their mortgages, lived in decent neighborhoods and put their kids through college all on an assembly line wage and a high school education. With the constant erosion of the auto industry in the US and the steady reduction in wages and benefits, an auto industry job will in no way represent the security and stability of past years. The question then is: what opportunities at a decent wage await people in the US with only a high school education in the new global economic reality. Although the book doesn’t proffer solutions for addressing these issues, I think its still a very good book about a very important time in the global economy.

“No thanks!” – HSBC sensibly decides to withdraw from acquiring Nedbank

The past couple of months has ushered in a flurry of positive deal and investment activity on the African continent, notable among which are the proposed acquisition of South Africa’s Nedbank by HSBC and Massmart – also of South Africa – by Walmart. Many analysts and investment managers focused on Africa and other frontier markets hailed these moves as signs that the rest of the world has begun to see the light in the “dark continent”. Investment bankers have been quick to talk up these announcements as just the advance party in a wave of acquisitions of African assets in the coming years.

Many analysts surely would have regarded HSBC’s recent announcement that it is pulling off from the deal as a blow to the “rising Africa” theory. Well I think this may be a setback for Nedbank and Old Mutual (its parent company that really can use the extra cash to deleverage its balance sheet). I believe this deal is idiosyncratic and is not representative of the potentials for acquisitions and investments in Africa. When the proposed deal was announced, I kept on struggling to understand the strategic benefits of the deal and I could not find any that was very compelling. I understand HSBC’s rationale for seeking a foothold in Africa: the continent is growing fast, banking penetration is low and banks can still make decent money from boring stuff like taking cheap deposits and funds out at much higher interest rates. Western bankers will give an arm and a leg to achieve the sort of Net Interest Margins that African banks take for granted.

So what is my grouse with the deal? HSBC picked the wrong target to expand in Africa. Nedbank is not Standard Bank – the market leader in South Africa with a wide footprint across the continent, it is basically the 4th largest bank in a South African market dominated by 4 banks!!. It has very limited operations in the rest of Africa and its international operations are concentrated in a handful of small Southern African countries. It is practically absent from the other big sub-Saharan African economies of Nigeria, Ghana and Kenya (not to mention North Africa). I concede that there is a partnership with Ecobank Transnational, which has a wide banking network across much of Sub-Saharan Africa. However, I don’t believe alliances are the most cohesive forms of business combinations and they can be like mermaids: i.e. you get a fish when you need a human and you get a human when you need a fish. The Nedbank-Ecobank alliance will be more valuable - in my opinion - if it were a merger. It is therefore clear that Nedbank is not the best vehicle for a bank like HSBC to gain a continent-wide exposure to the African banking sector. If it did the deal it would have had to execute another major acquisition – maybe with Ecobank – or buy multiple banks across Africa. Which is frankly time consuming!

Which leads me to the ideal suitor for Nedbank. I believe the ideal candidate for the bank has to be a global bank with an existing network across Africa that it can integrate Nedbank into. The two banks that fit the bill are Barclays Bank and Standard Chartered Bank. However, Barclays already controls ABSA: one of the big 4 banks in South Africa and I am near certain that the South African authorities will be very reluctant to approve such a deal due to competition considerations. Which leaves Standard Chartered Bank, which has a formidable presence across Western and Eastern Africa. It has significant operations in fast growing economies such as Ghana, Nigeria and Kenya, however the missing piece in its strategy is a sizable operation in South Africa (the region’s largest economy). Acquiring Nedbank will complete the picture and open up hitherto unlocked cross-selling opportunities. However, the bank – which is currently in the middle of a cash call – has basically signified that it would not be bidding as it intends to use the rights issue proceeds to bolster capital ratios not fund acquisitions. This really puts Old Mutual in a bind and it may have to reevaluate its strategy. However, if Old Mutual and its advisers want to get paid anytime soon, they have to beat a path to Standard Chartered CEO Peter Sands’ door and fall at his knees, kiss a ring and do whatever it takes to get him and his board to make a good bid for Nedbank. I think that is the only game in town!

Mobilizing domestic financing for infrastructure – recent positive developments

The past few weeks have ushered in a flurry of announcements of various policies/initiatives aimed at improving the infrastructure situation in Nigeria, with electricity power reform always leading the discussions. The reactions trailing the government’s decision to effectively privatize the electricity power sector has largely being met with positive comments by both Nigerian and international analysts. A major concern that has however underlined these positive comments has been the nation’s ability to attract sufficient investor interest in the power sector. An initial estimate of US$10 Billion is currently being bandied around as being required in the power sector.

This will require a massive sales effort by the government, the privatization agencies and the Nigerian finance & investment community. A very common response to the financing question has been: “Foreign investors are interested”. While I believe that the Nigerian power sector – if properly structured – presents a compelling investment proposition, there are also potential limitations that may prevent the expected rush of foreign investors. Firstly, Nigeria is setting on a privatization program for its electric infrastructure at a time that major emerging market economies are launching programs of similar nature. Brazilian President Lula has announced a US$500 Billion infrastructure upgrade plan, an integral portion of which will utilize private funding. The Indian Government is also planning a multi-billion dollar transportation and electric power upgrad that is expected to require huge private investments in the near future. Therefore, a lot of the infrastructure funds and big firms will be concentrating on these markets and we would face an uphill task competing against these destinations. Secondly, Nigeria also has some way to go in proving its stability as an investment destination particularly with the upcoming elections.

Hence, it is clear that while we should work hard at getting foreign investors we should also be doing as much as we can to mobilize funds domestically. That is why I am quite happy at PENCOM’s – the national pensions regulator – proposal to allow Pension Funds in Nigeria to invest up to 20% of their assets into infrastructure projects and funds. Given the current estimate of pension assets size of N1.73 Trillion (US$ 11.5 Billion), this proposal may free up to US$2.3 Billion for investments in infrastructure. I believe the bulk of these infrastructure investments will be in the electricity sector. I think the proposal to allow Pension Fund Administrators to invest in assets such as Private Equity and infrastructure is a good one as I have long believed that the pension guidelines - as they are currently written – suffer from an illusion of safety. I believe a good national pension fund system should serve two goals: mobilize savings for developing the nation and provide good returns on pension contributions to ensure a decent nest egg for retirees. The very restricted nature of the previous guidelines have led – in my opinion – to distortions or overheating of certain market segments in the country. Pension funds’ constant purchases of Federal Government bonds once pushed the yield on the longest dated (i.e. 20 year) bonds to 8%, in a country with double digit short term inflation rates!!! Analysts also believe that pension funds’ purchases of subnational, state government debt may also spark a bubble in the primary markets for such instruments.

This is why the current proposals to enable Pension Funds invest in infrastructure and private equity should be a win-win for both pension fund contributors and the economy as a whole. Infrastructure and Private Equity investing – if properly managed – should lead to greater diversification and mitigate some of the concentration risks in most pension portfolios. It should also be beneficial to the economy as the country will be creating a domestic capital pool for some of the electric power privatizations and investments that should be coming on-stream in the next 1-3 years. In addition, allocations to private equity should also help catalyze the emergence of a domestic private equity and venture capital industry that will provide much needed funding to early stage ventures, Small & Medium Enterprises (SMEs) and larger pre-IPO companies.

However, while the motives seem honorable and the benefits seem clear we must be mindful of potential pitfalls, with a key pitfall being the dearth of project finance structuring competence among Nigerian financiers. PENCOM should work with key DFIs such as the IFC to build pension managers’ capacity to properly evaluate infrastructure projects as well as private equity and infrastructure funds. The regulator has taken a step in the right direction by mandating minimum standards for such funds and projects, but it will need to go further to encourage best practices and ensure that fund managers do not engage in a race to the bottom to see who can throw the most money at the worst deals. These are solid proposals but the regulators, fund managers and the broader financial industry should work together that the pension contributors and the economy reap the most benefit possible.

The Next Brazil?

A lot has been made of the seminal Global Economics paper by a Goldman Sachs research team in which they heralded the dawn of a new era in the global economy and its driving forces. The report: “Dreaming with the BRICs” moved the discussions about the economic power of Brazil, Russia, India and China (BRIC) from the hallowed corridors of global investment houses and Bretton Woods institutions to the dinner tables of every globally aware household. Of this group, China & India have captured the imaginations of many who seek to make fortunes (or a quick buck) and added significant fuel to the fire burning under the policymakers or pessimists worried stiff about the decline of the United States and other G8 countries. Although the Dragon (China) and the Tiger (India) have gotten most of the attention, I seem to be personally most fascinated with “B” in BRIC: Brazil. I think Brazil has undertaken a remarkable journey with the potential to be greater economy, hence it probably represents the best model for developing countries – primarily in Africa – to emulate.

Why my fascination with Brazil? I think its modern economic and political history is much more similar to the rest of the developing world. On the political end: China has been governed in an autocratic fashion by a tight group of unelected “wise old men” since the communist victory of 1949 while India has remained a chaotic, multi-party, parliamentary democracy since its independence from the Brits in 1947. Brazil on the other hand has – like much of the developing world – had its fair share of democratic and not-so democratic civil rule, self interested military juntas and the often benevolent or enlightened military dictatorships. The country seems to have been a large scale experiment for various political and leadership philosophies: for heaven sake they replaced a technocratic, doctorate wielding president (Henrique Cardoso) with a former trade unionists born into poverty with very little formal education who turned out to be an avid free-marketer delivering record economic numbers (President Lula)!.

The country’s recent economic history is no less colourful. Brazil has been transformed from the hyper-inflationary land in which grocery prices changed a couple of times a week – or even in a day, to a country now able to issue long-dated bonds due to much more stable inflation outlooks. It has moved from an era of near habitual bond defaults to being adjudged investment grade by the most powerful folks in the world: the Rating Agencies. The Real has moved from being near worthless due to frequent devaluations to becoming one of the most actively traded currencies in the world.

Which now leads me to the most important question: which country will (or can) be the next Brazil?. One thing is clear in my mind: there will be no “next China” or “next India”, these countries are freaks of nature and cannot be replicated. No other country has got a Billion people and counting in an economy which (in the case of China) is run by a couple of old guys with decades of experience running stuff and who can always take a long term, pragmatic view of policy because they never have to bother with the “minor inconveniences” of elections and opinion polls. So the jury is out for African nations: you can’t be the next India or China, sorry!!. So we are left with the “Next Best Thing”: becoming the Next Brazil. So the question up for debate is what African country has the potential to be the next Brazil?. I would say it is Nigeria, not because I am Nigerian (it obviously helps) but because it is a view supported by serious people like the Development Finance Institutions (DFIs) and leading fund managers with experience in emerging economies. Although I admit that DFIs have a penchant for viewing the world with rose tinted glasses while emerging market fund managers are quick to talk up any country with half decent economic prospects (how else are they going to profitably exit the positions they’ve taken in such countries’ stock and bond markets). This notwithstanding, I believe compelling evidence exists to support the case of Nigeria of POTENTIALLY becoming the “Next Brazil”.

First is population. Brazil’s got about 190 million people while Nigeria’s got about 140-150 Million people which can form the base for potentially lucrative domestic markets. I believe domestic market sizes would become increasingly important for countries – particularly African ones – seeking economic growth. Let’s face it: we are not going to be the world’s workshop as China will have that honour for a while due to very cheap unit labour costs (the consequence of a billion people), low state mandated financing costs and ridiculously low electricity costs fostered by mind boggling hydro projects like the Three Gorges Dam as well as an almost fanatical commitment to cheap coal plants in this environmentally sensitive days. African countries are also not likely to become global hubs for high end manufacturing or products. That crown – in my opinion – will remain with the Europeans (due to excellent craftsmanship honed over centuries) and the Americans (with their world leading research universities). So African countries may have to rely to a greater extent on domestic investment and consumption to a greater extent than the Chinese have done. On this point, Nigeria is the most ideally placed African country to build a vibrant domestic market on the back of a huge population. South Africa – the other big Sub-Saharan African economy – with a population of 45 Million is simply too small to be creditably tipped to be the next Brazil. In fact many analysts expect Nigeria to eclipse South Africa as the biggest African economy within the next decade.

I also believe that going forward in this century, population size will become increasingly correlated to economic power and GDP size. I think its a classic situation of history repeating itself, this time through the impact of technology. For much of human history, human conditions were pretty uniformly grim across much of “the known world”, first through “hunter-gatherer” societies and then through subsistence farming. So it was quite simple, the larger a country or kingdom the larger its economy or GDP. What changed the game was the Renaissance (with the invention of joint stock companies, financial markets etc) and the Industrial Revolution (which ushered in machines, railways and automation). Both of these events led to productivity imbalances and the world was split into the “haves” (countries with the tools of the modern age) and the “have nots” (countries lacking such tools). So we could easily have small countries with the modern tools (industry, transportation, communication etc) having economies many times that of much more populous countries still stuck with near primitive tools, techniques and economic organisation. What has changed in the past couple of decades (and will probably be more pronounced in the future) is that as technology becomes more widely adopted, the productivity gaps among world regions will gradually shrink. Witness the rapid growth in mobile telecoms in Africa, the continent practically skipped the landlines that cost developed economies hundreds of billions of dollars to install over many decades. I expect this scenario to also play it in other areas such as the internet (we are going from having no access at all to adopting broadband and skipping dial-up). In a world that is hopefully more even in terms of productivity, it will be a return to the pre-Renaissance age in which population size largely determined economic size. Nigeria with 150 Million people (40% of whom are teenagers and below) is also better placed than many economies to be one of the next growth engines in the long term.

Second similarity with Brazil is the resource story. While very creditable stories exist chronicling effects of “Dutch disease” and the “resource cause”, Brazil’s recent history suggests that it is indeed possible to utilise bumper profits from as a catalyst for modernising an economy. It is generally accepted that life in the coming century will be a lot more resource constrained than in the 20th century with the attendant rise in the costs of such commodities. Nigeria – like Brazil – is quite resource rich with huge concentrations of Oil and Gas on both onshore and offshore locations. I expect that while Crude Oil has been the mainstay of the Nigerian economy for the past half-century, Natural Gas may turn out to be the growth engine for the future. The country is already ranked 7th worldwide in terms of proven gas reserves. These reserves will be further developed as nations all over the world shift from coal to cleaner burning Natural Gas and the country itself develops the domestic gas gathering infrastructure needed for dragging its citizens from darkness into the marvellous (electric) light. Bitumen is another resource, Nigeria accounts for much of Africa’s bitumen reserves. The massive infrastructure projects in major emerging markets is likely to improve demand for bitumen, lead to higher prices and help further validate the commercial rationale for bitumen mining. In essence, in the resource constrained “new world” in which we live, access to resources will underpin economic growth and on this point Nigeria seems to be a good bet.

….To be continued

President Obasanjo’s greatest achievement

The nation experienced eight years of good, bad and ugly times under Olusegun Obasanjo’s 2-Term presidency. Under his tenure good things such as privatizations, liberalisation of the telecommunications sector and repayment of almost all of our crippling external debt occurred. Some bad things such as the aborted 3rd term bid and widespread corruption and election fraud also occurred, while we were also not spared downright ugly events such as the Odi Massacre. However, I believe on the economic front, President Obasanjo’s most enduring legacy will be the Pension Reform Act of 2004. This reform has significant implications for our long term economic sustainability and is indicative of the sort of large-scale, system-wide policy initiatives that have to be brought to bear in tackling some of the big challenges that we face in the areas of electric power supply, healthcare, education, transport infrastructure and other burdensome issues.

The Pension Reform Act mandated the vast majority of companies operating in Nigeria to subscribe to Defined Contribution Pension Schemes. The employers and employees each contribute 7.5% of the employee’s monthly income into a tax-exempt Retirement Account managed by a licensed Pension Fund Administrator of the employee’s choosing. The Retirement Accounts were made fully portable with employees being able to migrate their accounts as they change jobs, a critical option in these days of high job mobility. To ensure proper security of these Accounts they were also mandated to be safeguarded by Pension Fund Custodians (PFCs) owned by well capitalised and regulated banks with strict investment guidelines provided to PFAs to guide their investment decisions. As unsexy and possibly boring as this reform may seem it occupies first place in my mind for a number of reasons.

Firstly, it provides a social safety net in a society that is sorely lacking in countries such as ours. We do not have unemployment benefits or social security payments like developed countries hence siblings, children and close family end up acting as many Nigerians’ pension plans and unemployment insurance programmes. Prior to the advent of the Pension Reform Act, pensions were an exclusive privilege provided only to employees of the government and very large companies – mostly domestic operations of multinational corporations. The vast majority of Nigerians just retired without any dedicated funds set aside for their retirement with many people being left to the vagaries of unstable personal savings and the fickle charity of friends and family. Even public sector employees with supposedly pensionable positions found it difficult to depend on their pension checks as pension payment backlogs grew due to a combination of corruption, inadequate budgetary provisions and plain incompetence associated with a “Pay as you go along” pension system. The pages of Nigerian newspapers were replete with tales of pensioners living in penury and giving up the ghost before the first pension cheques arrive. Adopting a compulsory system-wide process that reduces the government’s involvement in pension payments was a great step forward in extending a safety net to a greater number of Nigerians.

Secondly, the reform has helped improve the long term competitiveness of Nigerian Companies. A close following of the travails of the US automobile industry will realise that a major challenge to the long term profitability and competitiveness of the Detroit Big 3 are their substantial pension obligations. These companies typically run “Pay As You Go” schemes that depend on the payments of working employees to cover defined and contractual payments to the company’s retirees. This is okay when there are much more current workers than there are retirees, it really starts getting ugly when there are more retirees than active workers as the companies are liable for making up the difference and rack up significant pension liabilities in the process. This makes every single product produced by these companies relatively more expensive than those produced by firms without such costs. What the pension reform in Nigeria did was to move most of the country into a Defined Contribution system that caps an employer’s liability to the 7.5% matching contributions that have to be made very month for the period under which the employee remains in its service. This makes it much simpler as company management – and would be acquirers – don’t have to become actuarial experts trying to figure out how long their employees will live for and how much their payment obligations will grow by in the future, as the costs are explicit and clear and have to be accounted for every financial year so their are no pension time bombs waiting to happen!!

Thirdly, the Pension Reforms have led to the creation of a significant pool of investable assets that have a potentially significant multiplier effect on economic growth. As at last count, Pension Assets under management is estimated at about N1.7 Trillion (US$ 11.3 Billion) and represent the single largest investment bloc in our capital markets from a base of nearly zero just 5-6 years ago!!. The emergence of such long term funds has helped in making our domestic government bond markets one of the most liquid in Africa with maturities extending up to 20 years, up from exclusively short tenors (i.e. 90, 180 and 270 days) just a couple of years ago. Furthermore, Sub-National Governments – such as Lagos State – have been active in issuing bonds with maturities up to 7 years. Companies have also joined the rush with Guaranty Trust Bank Plc successfully launching and pricing a 5-Year, Fixed Rate Bond late last year (which happens to be the only corporate bond in issue in Nigeria). All these long tenured issuances – and planned issuances – would definitely not be feasible without the long term funds that the Pension Reform Act created. The positive effects of the reform extend well beyond the fixed income markets as they have had a stabilizing effect on the equities market as well. At the height of the market downturn, PFAs were one of the very few net purchasers of equities on the Nigerian Stock Exchange. Their buying activities probably helped in placing a floor on stock market prices and it is reasonable to suggest that the stock market rout would have been deeper and more sustained had sizable and investible pension assets not been in place.

However its not yet “Uhuru” for the Pensions Industry in Nigeria has the industry is likely to be plagued by a number of factors that may delay or prevent the full realization of the reform to Nigerians. The first is the potential for non-remittance and/or participation by employers. Although the Act details fines payable by employers for non-remittance of pension contributions to PFAs, it’s an open secret that many employers have not been as conscientious in making remittances as the Pension Act envisaged. The pension regulator – PENCOM – has to step up its monitoring activities in this regard to ensure that hard-working Nigerians are not been denied the opportunity to quickly begin building a nest egg. As if non-remittance is not bad enough, a number of employers and employees – especially in the very large informal sector – are yet to join the scheme. A lot has been achieved in boosting participation by government and Organised Private Sector (OPS) employees, the next frontier will be in ensuring active participation by the much larger informal sector. This must be an industry wide strategy involving PENCOM, all PFAs and the Federal & State Governments, as they need to embark on a massive enlightenment campaign to bring more “converts into the fold”. It sure will be good economics for all PFAs to participate in widening the pool of potential customers. Upper and Upper-Middle Class Nigerians can also help in this crusade by formalising the employment of their drivers, cooks and legions of domestic employers by encouraging and signing them to a Pension Scheme and making the required remittances .

The second challenge I foresee for the industry is a possible lack of capacity to deal with the relatively huge sums of money in the Scheme. The largest player in the industry currently manages about N450 Billion (approx. US$ 3 Billion) in hundreds of thousands of Individual Retirement Accounts. Now, managing a large mutual fund – because that is essentially what a pension fund with thousands of IRA accounts is – requires substantial analytical, operational and customer service support. PFAs need to bulk up the strength of their investment teams to ensure above risk adjusted returns to investors – a task that becomes increasingly more difficult as the funds get larger!. Furthermore, ongoing plans to allow PFAs to invest in asset classes such as Private Equity and Infrastructure demand different skill sets from the typical stockbroker cum listed-equities analyst types that currently dominate the industry. In addition, PFAs may also collaborate on shared services platforms to support their operations and customer service activities to save costs and enable fund managers concentrate on their core competence: managing funds and not spend precious time reconciling accounts and/or responding to IRA account holders’ queries.

On the whole I think the Pension Reform is one of the greatest positives in Nigeria over the last decade (alongside our exit from the Paris Club debt overhang). However, we must “work out our pension salvation with fear and trembling” to ensure that all Nigerians realize the promise of a golden old age and a fulfilling retirement.

“Premium on Political Power” - Nigeria and the unproductive craze for political power

We are intoxicated with politics. The premium on political power is so high that we are prone to take the most extreme measures in order to win and maintain political power, our energy tends to be channelled into the struggle for power to the detriment of economically productive effort, and we habitually seek political solutions to virtually every problem. Such are the manifestations of the overpoliticization of social life in Nigeria - Late Professor Claude Ake

The eminent professor's quote, although almost three decades old, still rings true in the Nigeria of today. Since he spoke those words the political parties have changed, some of the actors in this political drama of shame have also changed, the styles of the Babarigas and suits have changed and even the internet and mobile telephony have also come to change the way we live and communicate. However, one factor in our lives still remains as constant as the Northern Star: many Nigerians still continue to regard the pursuit of political power - either through a ballot box or the barrel of a gun - as a "do or die" affair entirely devoid of principles and focused solely on self-aggrandizement, preservation and crass opportunism.

Although elections are keenly contested in every country with considerable sums spent on campaigns, Nigerians and other Africans have taken them to a whole new level and have proven to be only too willing to shed blood over the results. I have often wondered why this is the case, and the simple answer is: Government is TOO DAMN LUCRATIVE. The most lucrative line of work in Nigeria is not financial engineering, neither is it biotechnology or some other “esoteric” endeavour, but public “service”. The quickest and surest way to riches does not involve innovating to bring about new inventions, business models or even entire industries as we have seen developed world tycoons do, it simply requires an election to an executive or legislative post (executive preferably as you have control over budgetary spending and security votes).

I have therefore come to the conclusion that the best way to infuse some sanity into Nigerian and African politics and break the vicious cycle of violence that trails elections is to drastically reduce the size, functions and revenue streams of our governments. I am convinced that our politicians will not become less rapacious and vicious simply out of the kindness of their hearts, they will do so only if there is little or nothing for them to embezzle and by snapping the arteries that feed the great vampire squid called the “political class”. One tested way of blocking these “arteries” is Privatization: Nigeria and other African countries need to accelerate the pace of their privatization programmes and ensure that every “State Owned Enterprise” is auctioned off. I don’t care who they are sold to or what prices they are sold for: although I would be glad if they are sold at fair valuations to competent and credible organisations but that isn’t even a deal breaker for me. The critical point is to ensure that these companies cease being “wards of the state” with business operations existing solely for the enrichment of political party members.

Many Nigerians can still remember a time when the largest banks in the country were majority owned by the Federal Government, with many politicians – and military apologists – coming to regard the chairmanship and directorships of such banks as nothing more than “jobs for the boys”. The board members were making out like bandits while the banks were underperforming and neglecting their desired intermediation role in the economy, thereby hurting the very taxpayers that ended up subsidizing their inefficiencies. As if that was not enough we had to endure decades of import license regimes – our own insidious version of the Indian “license Raj”, which created black markets through which politically connected people made good money from just auctioning off these “pieces of paper”. As if this was not enough to test the patience of the ever long-suffering Nigerian populace, obtaining an amenity as basic as a telephone line became a jostle for supremacy as only people close to the powers that be could avoid a waiting list that was many years long. Now most people can just walk across their homes, buy a SIM card and be instantly connected for less than a thousand naira and I am sure nobody bothers to be friends with the district managers of NITEL (the state-owned company that has now lost its telecommunications monopoly)

Given the near eradication of the above mentioned absurdities, one will be tempted to declare victory and believe that we have climbed out of the abyss. However, this is far from true as the same disease is manifesting though different symptoms. Fertilizer distribution in the agrarian communities of Northern Nigeria remains a key avenue for patronage, with many fertilizer distribution lists closely approximating the membership lists of the political party in power. I still struggle to understand why the Federal and State Governments should concern themselves with importing and distributing fertilizer? This is something that can easily be left to the private sector with market forces ensuring that “rent seeking” middlemen are cut out with the farmer assured of constant supply at competitive prices without having to belong to the party in power. Electric power is another issue, as long as PHCN retains the effective monopoly for generating, transmitting and distributing electricity, Nigerians will continue to suffer the near-total absence of power while politicians use the Company as a time-tested and dependable avenue for patronage. Every year billions of dollars will be spent on generating plants, building transmission lines and buying transformers yet little discernible progress will be made in the electricity situation. The simple solution is to get these assets out of the government’s hands, private concerns will run it more efficiently and deliver reliable electricity to consumers at a fraction of what it will cost the government.

If Dr. Jonathan seeks to write is name in gold lettering in the annals of Nigerian history,, he would have to tackle corruption head-on and the best way to start is by instituting an aggressive privatization plan to sell off every concern that is not directly related to ensuring a social safety net and providing security law and order. I believe strongly that politicians in Nigeria - and Africa in general - would not get on the “straight and narrow” simply because it is the nice thing to do, they will only do so because of structures that constrain what can be mismanaged and misappropriated. It’s high time we starved these “great vampire squids” of blood!!

Electricity in Nigeria: Light at the end of the Tunnel?

“It is not written on the face of Nigerians that thou shall not have reliable electricity” – Prof. Bart Nnaji.

The above quote is from Prof. Bart Nnaji, professor of robotics, former Minister of Science and Technology, power sector entrepreneur and most recently the man charged by Acting President Goodluck Jonathan with delivering a new power sector blueprint. Prof. Nnaji’s statement summarises the frustrations felt by many Nigerians regarding the power situation in Nigeria and the attendant negative impacts that the power sector has on the Nigerian economy.

If the “Olduvai Hypothesis” statement of electricity being “the lifeblood of civilization” is true, then Nigeria must still be in the stone age with our businesses and households existing as though Thomas Edison was yet unborn. Our electricity sector is one of the worst in the world and is more reflective of a post-conflict society rather than that of a country that claims to be “the giant of Africa” and whose politicians are quick to state an ambition to be one of the top-20 economies in the world by the year 2020 (i.e. “Vision 20-2020”). Many economists agree that the parlous state of electric power supply in Nigeria is fully responsible for knocking one or two percentage points off our GDP growth rate as the most elemental of businesses, such as barbershops and photocopy centres, have to generate their own electricity and be left at the mercy of an equally precarious petroleum products supply chain. I firmly believe that the Nigerian economy will be set for unprecedented growth once businesses are liberated from the yoke of a power sector which has remained moribund despite billions of US dollars in government spending.

The key, in my opinion, to revamping the sector is not more government spending but a near complete liberalization of the sector. We must apply market-driven best practices to the power sector and fast track the unbundling, commercialisation and eventual privatisation of the PHCN. Market forces must be brought to bear in every aspect of the electric power value chain right from the gas supply infrastructure to the last-mile to the customer. Nigeria must be one of the few countries in the world in which gas-fired power plants will be fully completed and commissioned without the gas supply infrastructure to the plant sorted out. We must have a couple of hundred megawatts of electricity generation capacity idling because there is no gas supply to the plants, in a country ranked 7th in terms of proven natural gas reserves in the world. The answer is simple: the Oil companies would not invest in the domestic gas gathering infrastructure until the gas purchase contracts are at economically competitive prices which will ensure that they recoup their investments with a decent return on invested capital. The Federal Government can threaten all it wants but the honest truth is that domestic gas supply will remain poor until the gas supply arrangements are at market rates.

Secondly, the government must get out quickly from existing plants as well as those under construction or even contemplation and sell them to private operators. Most Nigerians above the age of 20 can vividly remember the pre-GSM era when NITEL officials were demi-gods who needed to be bribed, begged and even fed to fix lines that were disrupted due to the organization’s own inefficient billing system. I firmly believe that had NITEL kept its monopoly and the Federal Government pumped in enough money to rival all the investments by the various GSM companies to achieve our current 67 Million active lines, we would still not be able to check our account balances and we may never be able to make any calls on weekends when NITEL officials will want to spend time with friends and family. Anyone who thinks I am exaggerating should check the last time he saw someone make a phone call on the Mtel network ( NITEL’s GSM subsidiary).

Distribution Companies should be privatised quickly to competent private operators who will seek to profit by ensuring that the little electricity we generate gets to the consumer and is not wasted due to the inefficiencies of people who will complain of a lack of ladders. Generation Companies should be sold to profit motivated people willing to negotiate gas supply contracts at rates that will ensure that thermal gas plants do not turn to mere architectural masterpieces. Furthermore, these Gencos will also sign agreements to supply electricity to Distribution Companies with Service Level Agreements which will attract penalties when the terms are contravened. These investors will ensure that multi-million dollar turbines purchased are not left to rot in the ports, incurring demurrage for 4 years!!. Finally the National Grid, due to its sensitive nature, should remain under government control but with management and operation outsourced to a competent international firm whose compensation shall be transparently tied to the performance of the grid. Even the notion of a single National Grid should be also up for debate, why can’t we have multiple grids? Why must a Generating Company in Delta State seeking to sell power to the Port Harcourt distribution company have to go through a National Grid Station in Osogbo, Osun State?. We can break the grid into manageable chunks and get on with giving Nigerians electric power.

Will all this market determined rates lead to higher tariffs? You bet it will! My response to that is that the current PHCN tariff is artificial, Nigerians currently pay multiples of it by way of very expensive self generated electricity. The cost of small scale diesel-generated electricity, the main power source in Nigeria, is many times higher than any tariff a commercially minded electricity utility will charge. The government may choose to subsidize commercial tariffs over a period of time using some of the proceeds of the commercialisation and privatization programme. However, I think many corporate bodies and manufacturers will gladly pay higher fees, even in the absence of subsidies, as they will be spared the the capex of power generators and the recurring costs – and headaches – of purchasing diesel. I am sure MTN will be glad to stop maintaining 2 diesel generators per cell site and avoid its over N700 Million monthly diesel bill.

To deliver on these goals, the government must strengthen the regulatory capacity of the electricity sector’s regulator: Nigerian Electricity Regulatory Commission (NERC) to ensure that the reforms are carried out and the system works as envisaged.

Nigerians are one of the most enterprising people on planet earth and they will do much more with reliable electric power supply. I hope Acting President Jonathan writes his name in platinum by devising and executing a plan that rescues us from an electricity sector that has subjected many to subsistence living and exposed the nation to ridicule.

Sanusi Lamido Sanusi – Nigeria’s Electrifier-in-Chief

To say that the foundations of the Nigerian economy have been battered by a network of infrastructure that threatens to wreak havoc on the real economy and frustrate many manufacturers into penury is to state the bloody obvious. Every now and then the papers and airwaves are replete with stories of manufacturers kissing the dust or making the infinitely wise decision of relocating to Ghana – a nation blessed with markedly better political leadership - and there seems to be no end in sight to this sorry tragedy. The single biggest actor in this show of shame is the Power Holding Company of Nigeria (PHCN), the state run electricity generation, transmission and distribution company.

The link which has not been explicitly made in the past but which is becoming clearer to the Central Bankers and the bankers that they regulate is the often-overlooked link between banking sector stability and infrastructure development in Nigeria. The Nigerian banking sector has somehow managed to thrive over the past two (2) decades through good times and bad, even in the throes of the despotic reign of a certain dark sunglasses wearing general. Nigerians have therefore come to expect steady growth in profits for our banks and analysts have come up with a myriad of reasons to support this, tossing out random buzz phrases such as: “rise of an emerging middle class”, “financial supermarkets” and other marginally useful terms. Many Nigerians were however taken aback when almost every Nigerian bank started to declare losses in the past few months, with some losses running into hundreds of billions of Naira. The veil of invisibility had been lifted and we finally saw that – in some cases – the “bank manager actually had no clothes”.

It is become increasingly apparent that there is a close link between the health of the Country’s infrastructure and the health and lending practices of our banks. For as long as the real sector remains comatose we will be jumping from one banking crisis to the other. A developing country such as ours in which manufacturing and other forms of industrial activity remain unviable primarily due to a combination of a horrid electric power supply situation and a 19th-century quality transportation network, cannot reasonably expect its banks to lend to real sector players. And if they cannot lend to the real sector, they have to find alternative outlets for the ample deposit bases and equity capital that they raise. This has driven the bankers’ craze in financing the purchase of assets such as Real Estate and Ordinary Shares, which they feel have a ready market and are prone to steady increases in value thereby insulating them and ensuring that they get their moneys and contractual interest back while their debtors also smile to bank. In a period of rising asset prices (such as that witnessed between 2005 and 2007) this arrangement works perfectly and everyone – creditor and debtor alike – smiles with fattened pockets.

What no one planned for was the bursting of the bubble and the rapid deterioration of the assets collateralising bank loans. One thing is therefore clear, until the productive sector is developed and rescued from ruin, our banks will continue to feed asset bubbles which will surely burst at some point and we will back to square one again. We have gone through a phase when our banks speculated on Foreign Exchange (the days of “round tripping”), to a time when they basically dealt in taking cheap deposits and parking them in (then) high yielding risk free government debt. Now the latest phase involved them betting the house on equity securities and/or equity collateralised loans. One common thread is common to all these instances that have spanned the better of two decades and it is the lack of bankable projects in the real sector which is in turn driven by inadequate infrastructure. That means that in order to put our banks on a solid footing and mitigate subsequent banking crises, we must make the real sector a viable option for bank lending and that means tackling inadequate infrastructure head-on!!.

That is why I was heartened by the CBN’s decision - following its recent Monetary Policy Committee (MPC) meeting - to create a N500 Billion special fund for financing emergency power projects across the country. The fund will be financed wholly by the CBN through “Quantitative Easing” (banker code for printing money) and will be channelled to banks in Nigeria – through the government-owned Bank Of Industry – at a rate of 1% for onward lending to identified power projects at a maximum interest rate of 7%. The bankers are to originate bankable projects that can be financed through this arrangement, while the Manufacturers’ Association will cooperate in purchasing power from these plants by industrial concerns. This will help reduce the manufacturers’ enormous annual cost of fuelling diesel generators and remove the high barrier requirement of having to finance their own power plants. I believe the use of market mechanisms such as bank lending and private ownership of generation assets will help to bring some discipline into a sector that has been marked by patronage, corruption and mind-boggling incompetence. Furthermore, a One (1) month deadline has been imposed by the CBN for the Fund’s modalities to be finalised by a special committee involving various stakeholders and the technical adviser to the project: the Africa Finance Corporation (AFC). In addition to electric power, the Scheme may also finance other real sector projects that were identified during a meeting between the committee of bankers in Nigeria and State Governors.

However, although I do not particularly relish being a prophet of doom, I think there are a number of potential pitfalls that should be identified and proactively tackled if we are to prevent the establishment of this Fund from being an exercise in futility.

Firstly, the clause included about “real sector projects certified bankable that emanate from the State Governors’ engagement with the Bankers’ Committee in line with the outcome of the Enugu Retreat will be accommodated under the facility“ has the potential to destroy the entire Scheme. If care is not taken, every State Governor in the country will be seeking for some or all of their pet projects to be financed through the Fund and governors are difficulty people to say NO to!!. There may be calls for the funds to be uniformly distributed across the country, even though we all know that bankable projects are far from being uniformly distributed across the Country. There just has to be a way to minimise the political influence on the scheme, because before we know it somebody may be seeking to finance a grandiose stadium in his state capital through the Fund.

Secondly, the banks that will be managing the lending and credit decisions involved in financing the plants need to invest in serious human capital upgrades, very few Nigerian bankers have experience packaging projects of this nature and it is infinitely wise that they realise their limitations. It is quite a leap to reassign a banker from evaluating loans to diesel importers to start to determine the commercial viability and financing structure of a billion dollar power project, and this is a leap which prudence and good judgment should prevent us from making!. They need to hire people with experience of handling transactions of this nature and they need to do it fast before their fingers get burnt!

Thirdly, I would suggest that specific intervention funds be set up instead of trying to make this scheme an all encompassing one. A 2nd major infrastructure deficiency mentioned in earlier Bankers’ Committee meetings was transportation. Our transportation infrastructure is plainly terrible and is more representative of that of a nation just emerging from decades of ruinous conflicts. There are a number of bankable roads in Nigeria that remain death traps despite the obvious willingness of Nigerians to pay for travelling on better roads and an increased probability of being there to watch their kids grow up. We should start a massive nationwide push to privatize commercially viable roads such as Benin-Ore, Lagos-Ibadan etc and concentrate government funds on roads that need subventions to exist. If we provide entrepreneurs with cheap 6-8% long term loans, we will all see miracles emerge on our roads. We need a similar scheme such as the one being proposed for power to support private sector participation in transportation infrastructure, particularly railroads. We must be one of only a handful of countries where bulk materials such as cement and fuel are transported over long distances with 30 ton trucks, a terribly inefficient and expensive way to transport such products. We all collectively suffer price premiums and “transportation push” inflation on the consumer goods that we buy. We must also be one of the few countries in which the primary mode of inter-state travel is the 18 Seater bus, which also makes human transportation unnecessarily expensive and the effects of petrol price increases all the more pronounced.

On the whole however, I salute and commend the courage of the CBN governor in tackling some of the country’s fundamental problems since our political leaders are too busy with petty issues and succession warfare to be concerned about the plight of the citizenry. Let the politicians keep playing games with our destinies, Governor Sanusi is determined to “quantitatively ease” Nigeria into having a better electric power infrastructure.

10 Big Ones for Vaccines

That Africa and much of the developing world suffers from the triple scourges of HIV, Tuberculosis and Malaria is not anything new to anyone. Everyday many people die from these diseases, with youngsters and children being disproportionately affected by these diseases. African countries - particularly those in Southern and Eastern Africa - continue to lose hundreds of thousands of able bodied citizens and suffer great economic setbacks due to the effects of these triplet agents of death.

These diseases have become more challenging to fight due to inadequate investments in vaccine technology and drugs. Though Malaria is one of the biggest killers of children in the world, it attracts some of the lowest amount of research dollars. Cancer, a very potent "taker of lives" alongside the three scourges mentioned above, attracts many multiples of the research funds being put into combating malaria, HIV and TB. And the rationale for this situation is simple: cancer's victims are overwhelmingly richer than Malaria sufferers hence making them a lucrative market.

It is a simple fact that the people most afflicted with Tuberculosis, HIV and Malaria are some of the people least able to pay for the required treatments. Drug companies are the main funders of pharmaceutical research worldwide and like any other company, they are primarily - and justifiably - focused on maximising returns and value for their shareholders. To expect them to act otherwise is to encourage them to act in a manner detrimental to their shareholders. Since affluent people are the most lucrative patients, it makes perfect sense for drug companies to concentrate their scarce resources on those most able to afford treatments and provide a clear path for the recouping of invested monies. Hence, the reason why these diseases have been underinvested in, because quite frankly the mass of patients that can afford to pay top dollar does not exist to make multi-billion dollar investments in malaria research pay off.

This is one of the situations in which market systems, which have worked so well to ensure human progress, falls short. A pure markets approach to drug development will ensure that vaccines and drugs for deadly diseases that afflict the world's poorest remain in rudimentary (and largely non-effective) forms, while we continue to make rapid progress in treating acne and developing Botox treatments for fighting wrinkles and ensuring that 70 year old ladies can keep on looking like they are still 35. (Not that I have anything against looking young!!). It is however clear that for the human race to rise up to the challenge of stemming pandemics and rescuing millions from the jaws of death, governments, NGOs, foundations and multi-billionaires must work to subsidize research into life saving applications that address the scourges facing the poor. It does not make economic sense for the drug companies to wholly bear the risk of development and that is why the civil society must subsidize research and make it economically feasible for pharmaceutical companies to deliver much needed treatment for the poor. This is particularly important for vaccine development because just a few drops of vaccines have the near magical potential of preventing or drastically reducing the odds of a lifetime of medication, pain and - to the delight of ardent capitalists - many days of paid sick leave. Imagine if every child was immunized against malaria?, that would be many millions of tablets of quinine saved.

That is why I was so glad to read that the uber-rich guy: Bill Gates had declared that this decade should be the decade of vaccines. And he went ahead (in a way only deep pocked billionaires like himself can) to put his money where his mouth is by announcing a pledge by the Bill and Melinda Gates Foundation to commit to financing vaccine development to the tune of US$10 Billion over the next ten years. Although details of this plan are still sketchy, many expect that the foundation will concentrate on funding the basic Research and development that will go into ensuring that vaccines for diseases such as Malaria, HIV and TB can be developed and delivered to people who need it the most. I envisage that the foundation will invest - by way of grants - in projects that have a lot of technical and social promise but which may be too financially risky for the drug companies to take up. This knowledge and/or intellectual property can then be freely licensed to various drug companies that may seek to commercialise such breakthroughs. This strategy is one that is likely to work in the future as many civil society groups and philanthropists work hand in hand with profit-motivated groups such as drug companies to tackle the challenges facing the world.

Mr. Gates and his wife are also continuing in that time tested American tradition of the benevolent billionaire seeking to enact positive social change and development through the sheer force and will of his chequebook!. The famous American Steel magnate: Andrew Carnegie who was fond of saying that "the man who dies rich dies disgraced”. Many generations of billionaires including Carnegie himself, John D. Rockefeller, Henry Ford, Lord Sainsbury etc have all worked to bring their considerable fortunes to bear in solving societal challenges and have funded public retirement schemes, universities, scholarships, hospitals etc. It is high time those fortunate enough to be billionaires in our country apply some of their personal wealth, fortunes and innate creativity into meeting the developmental and social challenges facing our country: Nigeria. I would love to live to see the day when one of our own billionaires would also give 10 big ones up for supporting vaccines, primary healthcare delivery, early childhood education or whatever social cause catches his/her fancy. Now, that will be worth writing about!

2010 - AMC to the rescue?

Thank goodness 2009 is over!!. For those of us in the Nigerian financial markets, 2009 is a year which we hope will never repeat itself in a very, very long time to come. During the year the All Share Index of the Nigerian Stock Exchange (NSE) dipped 34% after an equally disheartening 46% loss in 2008. Primary securities issuance was abysmally low with many planned equity offerings being shelved and the very few deals that were launched recording abysmal subscription levels. With the only green shoots being noticed in the primary markets being the fairly successful state government bond issues.

More significant than the stock market declines was our stark (Lamido Sanusi driven) realisation that our "emperors had no clothes". We found out in the aftermath of the - aptly named - "banking tsunami" that some of our biggest banks had been little more than horribly mismanaged bags of risks waiting to explode!. Seven (7) banks have been recapitalized on the taxpayer's dime and new management installed by the regulators, while the entire sector has been given a wake up jolt. For the first time many Nigerians read of multi-billion naira bank losses with at least five (5) banks recording negative equity positions (i.e. technically insolvent) with shareholder value being almost completely eroded.

As if these were not bad enough, we are entering 2010 with a new found appellation as a "country of concern" in terms of terrorism and a president whose health status remains an item of - often timid and insincere - speculation and debate. So out of this pandora-like box of troubles and concerns is there any hope for the Nigerian capital and financial markets? What is that rare glimmer of hope or green shoot of grass that we can all look forward to?. For many people in the financial markets, that will be the Asset Management Company (AMC) being proposed by the Central Bank of NIgeria.

While I recognise that the AMC is not a silver bullet and that the woes of the Nigerian markets and economy will not magically disappear with its advent. I still believe that the AMC - as conceived by the Central Bank - will still go a long way in restoring some modicum of health to the country's financial sector.

Firstly, the Central Bank's decision to have the AMC purchase loans - at least those collateralised by marketable securities - at a premium to their marked down values will help bank's restore some health to their balance sheets. Buying the marked down loans from banks at a premium to their book value will result in a capital gain and increase in the banks' core equity. This is in effect a recapitalisation through the "back door". Given the poor state of the Nigerian Equity Markets, the banks should be more than willing to take advantage of any recapitalization opportunity they can get.

Secondly, the AMC will free up significant liquidity for banks as it will swap banks' distressed loan books with highly liquid federal government debt instruments. Thereby immediately boosting the banks’ liquidity ratios from their current near nightmarish levels. This will enable banks jettison a lot of their non-accretive loan assets that are not generating significant income for the banks. Furthermore, the liquidity boost will reduce the need for banks to chase expensive deposits which have put upward pressures on lending rates and downward pressures on bank margins and profitability. Hopefully, some of these dollops of liquidity will result in the creation of new loans and help ease the current credit contraction in the Nigerian economy.

In addition to the above, the AMC may come in handy in the area of "duration extension". A major characteristic of loans in Nigeria is the very limited tenure extended to borrowers with principal repayments typically scheduled within 3-6 months of signing loan agreements. I would bet that a good chunk of the non-performing loans - particularly those advanced to companies with strong business prospects - can still be redeemed if the companies are given some leeway to trade out of their current situations. The AMC will have access to long tenured financing in the form of government guaranteed 5 and 10-year bonds and this will give them the opportunity to offer longer tenored debt as opposed to the typical banks that rely on 90 and 180 day fixed deposits for financing their loan books.

All in all, I think the AMC will be a new lease of life for the Nigerian banking and financial sector and the sooner our national legislators pass the bill to establish it the better the economy will be.