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Solomon Adegbie-Quaynor, Chief Investment Officer, Global Client Leadership and Strategic Investments, International Finance Corporation (IFC), spoke with Jide Akintunde, Managing Editor, Financial Nigeria Magazine, on the imperative of infrastructure development in Nigeria and leveraging pension assets as well as multilateral investment. They spoke against the backdrop of the discussions at World Pension Summit: Africa Special, which held on September 27-28 at the Transcorp Hilton Abuja.

Jide Akintunde (JA): It appears there was a pushback by participants at the just-concluded World Pension Summit: Africa Special in Abuja on the calls that Nigerian pension funds should play a more frontline role in infrastructure development. The fiduciary responsibility to pension contributors was taken to be all-important. What is your view on this, given Nigeria's quest for infrastructural development and the existent financing gap?

Solomon Adegbie-Quaynor (SAQ): My view is that the fiduciary responsibility to pension contributors should be paramount at all times. However, there can and could be alignment between the interests of pension contributors and the potential benefits from commercially viable infrastructure projects that could be pursued by Pension Fund Administrators (PFAs). Pension contributors expect their PFAs to make well-informed investment decisions on their behalf for the long-term, which averages 30 years for contractual maturity of pension liabilities.
    
Some key factors, therefore, for PFAs to consider include the fact that poor infrastructure in Africa can result in up to 2% reduction in GDP growth. Another issue is the perceived safety of investing in government treasury securities. The safety is not perpetual – as real returns could be negative in the future, depending on interest rates offered and inflation rates. Also, poor infrastructure hinders Nigeria's regional and global competitiveness in production of goods and services. That, in turn, adversely affects the potential for financial returns in investments in listed private companies and other permissible pension investment risk asset classes. So it is logical and prudent for PFAs to be interested in the infrastructure investment class.  
    
However, if infrastructure projects are not bankable – that is, if they are not properly structured, with sufficient cash flow to create a high probability of success – and their enabling environments remain poor – where tariffs are below cost recovery and don't incentivize investment – then PFAs should not invest in these infrastructure projects. The responsibility of ensuring that most infrastructure projects are structured to be bankable with attractive enabling environments lies primarily with governments. All the same, there are smaller scale business-to-business infrastructure projects that do not require government's involvement.

JA: I am cynical about Nigeria's quest for public infrastructure development in light of the poor governance environment, lack of local skills for project development, lack of local technology, expertise and financing. All of these would make projects quite costly in the country. So, how can the country take a strategic long-term view of where we should be and ensure we get there in relation to infrastructure?

SAQ: Your concerns are well noted. However, with strong government commitment and planning, partners such as the IFC and the broader multilateral institutions such as the World Bank Group and the African Development Bank, will be there to support private participation in infrastructure development. This could lead to the start of a well-executed infrastructure/PPP concessioning process in Nigeria. The current macro environment also makes it imperative for the government to focus on improving infrastructure in Nigeria, during a period of limited budgetary resources and where the local skills for project development, execution and operations of infrastructure are lacking.  
    
In my view, the government should be selective on infrastructure projects based on their potential high impact and probability of success (which I refer to as “doability”). They should include both government-owned assets (e.g. the government joint venture independent power projects (IPP) with the oil majors, gas projects, airports, key transport corridors) and greenfield or brownfield private projects. There are examples of such private projects, including Dangote Group's petroleum refinery, fertilizer, and offshore gas pipeline projects; Helios' investment in gas distribution assets; Seven Energy's gas infrastructure; and ARM's New Town development in Lekki, Lagos.
    
Government should also take advantage of its own related institutions that have already demonstrated to private investors and operators their transparency and good governance, such as the Nigeria Sovereign Investment Authority (NSIA), and the Africa Finance Corporation (AFC), to create a governance structure on the privatization of these select infrastructure assets. This will attract multilateral and development finance institutions (MFIs and DFIs) and commercial partners to work with NSIA as the primary execution agency for privatization of these select infrastructure projects, with a transparent governance structure that includes the government, MFIs/DFIs and the private sector.
    
Infrastructure is a large part of the global agenda around Sustainable Development Goals, and so MFIs/DFIs are seeking to lend their expertise in new ways and on a much larger scale than in the past. IFC, for example, is engaged in global collaboration with other multilaterals and private banks to scale up infrastructure financing with greater private capital mobilization. If select projects are addressed on an emergency basis and separated from the traditional approval process for public infrastructure PPPs in Nigeria, it can create tremendous momentum. With early success and the infrastructure improvement expected, the Nigerian government will develop greater confidence to broaden the infrastructure PPP process. We need to start well, so selectivity, high-impact and doabilty are key!

JA: The IFC has been involved in structuring investment vehicles in Nigeria. What are the initiatives you have helped deliver in the area of pensions and how well are they serving the investment market?

SAQ: The IFC has a large circa US$1.5 billion investment portfolio in Nigeria, in key sectors such as infrastructure, telecoms and technology, manufacturing, hotels, commercial property, healthcare, education, banking, insurance and microfinance. In the area of pensions, we have mapped out the PFA industry to identify investment opportunities. However, to date, we have not made any investments and this is primarily because the investment needs of most PFAs at this stage of their development is limited, and we generally prefer to not purchase secondary shares as a DFI.
    
On the other hand, we have been working with National Pension Commission (PenCom), Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN) and the Ministry of Finance over the years to support the creation of new risk asset classes for pensions. These include: supporting the establishment of the Debt Management Office (DMO); advising SEC on rejuvenating the corporate bond market where we placed a resident advisor within SEC for 2-years; advising PenCom on revision of the investment guidelines; and working with the regulators to create an international supranational issuance category led by IFC issuing its first naira bond in Nigeria targeting local pension investors. This was followed by an AfDB naira bond issuance.
    
We continue to develop new risk assets targeting African pensions. For example, IFC has partnered with GrowthPoint Properties and Investec Asset Management to create a pan-African commercial property platform (offices, mixed-use, retail, light industrial real estate). IFC has committed $40 million and GrowthPoint committed $50 million and we are currently fund-raising. It is expected that up to 40% of the platform's investments over the long-term will be in Nigeria. However, it is challenging for Nigerian pensions to invest in the platform as it is a pan-African vehicle, which is critical for risk diversification and optimizing returns. This platform will be listed as a REIT (Real Estate Investment Trust) once it reaches an optimal size. Another example is the JV between NSIA and GuarantCo to establish the Nigerian Infrastructure Credit Enhancement Facility, which is intended to credit-enhance infrastructure and mass-housing projects to attract pensions and insurance investors, amongst others. Lastly, PenCom and IFC are working on deepening our partnership going-forward.

JA: It was suggested by the high-level panel you participated on at the WPS that a single narrative that focuses on government-sponsored infrastructure tends to magnify the infrastructure development challenges in Nigeria. And you particularly highlighted the possibilities in the B2B and B2C infrastructure spaces. What is IFC looking at in these areas that you would like to highlight for more participation?

SAQ: IFC has a comprehensive infrastructure, housing and property strategy in Nigeria.  We have financed the Azura IPP, Eleme Petrochemical, Eleme Fertilizer, Helios Towers, IHS Towers, Seven Energy Gas, UPDC mixed-use property, and Persianas retail malls, amongst others. We have several similar projects in the pipeline including other IPPs, distribution companies (discos), solar projects in northern Nigeria, and Dangote Fertilizer. We are also in early discussions with the Dangote Group on its proposed 550km offshore gas pipeline. There are also smaller captive power and gas distribution projects we are considering but it is too early to disclose specifics.
    
Mobilizing additional investors into all of these projects is a key part of IFC's mandate. Hence, mobilizing Nigerian and other African pension funds into such infrastructure and housing projects that require local currency solutions, at the right time, is also part of our goal.  

JA: You reacted to the notion that adherence to ESG principles poses another layer of challenge to doing infrastructure projects in Nigeria. Are you seeing a glass half-full while others see a half-empty glass, and how can we get the dialogue on Sustainability going in a meaningful way on the Nigerian deal landscape?

SAQ: Incorporating good environmental, social, and governance (ESG) practices into infrastructure projects from the beginning is good business, and this is what we expect with all projects where we are involved. It is a combination of good risk management and value addition. Let me break this down – imagine if you have not done a social study on a greenfield infrastructure project, and as a result, the community sabotages the project? It is not only about identifying such risks but also working with the communities on acceptable solutions. So we try to understand where our clients are on understanding and executing good ESG practices and we then work with them to design a customized environmental and social improvement plan with a good monitoring and correction system.
    
We look to imbue this understanding with all the institutions we work with, and we agree that our clients are at different stages of appreciation and execution of good ESG practices. We are, therefore, working on different programmes to deepen execution of ESG practices in Nigeria and other markets. An example is a programme that we have with the Central Bank of Nigeria, commercial banks and local environmental and social advisory firms. It is aimed at helping implement the Nigerian Sustainability Banking Principles that were developed and adopted by the Bankers' Committee under the former Governor Sanusi Lamido Sanusi. We welcome good and committed partners on this journey.

JA: Do you have reasons to be optimistic about infrastructure investment in Nigeria, and how it can boost economic recovery in 2017, given the 2016 debacle?

SAQ: We believe that the government has to focus on infrastructure development during this particularly difficult period for the benefit of the overall economy. However, results will be dependent on government's commitment and leadership. We know that partners such as the IFC stand ready to support the government and all the other stakeholders if there is strong government commitment and leadership, as well as selectivity, high impact and strong possibility of success of the selected infrastructure projects.