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.