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How risk management tools can mobilise investment into Nigeria 15 Nov 2018

Despite the achievements of the Presidential Enabling Business Environment Council, (PEBEC) inaugurated by President Muhammadu Buhari in 2016 to remove the constraints of doing business in Nigeria, the country’s ranking dropped in the Doing Business 2019 report released last month by the World Bank. Nigeria slipped one place from the 145th position in the previous ranking to 146th out of 190 countries in this year’s edition of the report.
    
Central among the challenges that add to the cost of doing business in Nigeria is lack of effective risk management structures. Indeed, to ease doing business, Nigeria needs to improve risk management.   

In every economy, risks are a given. But they can be elevated in some environments as is the case in Nigeria where political risks, terrorism, militancy are among the disincentives for investment. For instance, there are significant security concerns in the Nigerian blue economy – or what is generally referred to as maritime sector. Given the country’s various security challenges, vessels and cargoes destined for Nigerian ports attract higher insurance and freight rates.

In spite of assurances by specialized risk professionals who say the Nigerian insurance risk profile was exaggerated, the Lloyd’s market has maintained a stance that raised freight and insurance costs in the country as far back as 2000. The risk assessment by Lloyds since the height of the Niger Delta militancy has been retained till today. As a result, kidnap and ransom insurance needs to be purchased by most expatriates working in the Nigerian oil-producing region.  

However, many insurance experts do not find the risk assessments of Nigeria in the international insurance space to be justified. For instance, Alasdair Walker of Allianz Global Corporate & Specialty (AGCS), whom I spoke with on the sidelines of the African Risk Frontiers event last year said the risk assessment of the country is “unfair.” He strongly proposed a review of the country’s ratings by the global rating agencies.

Walker and other executives in the insurance sector, including Genevieve Ahinful, Underwriter at African Trade Insurance Agency (ATI), expressed their concerns for African businesses from the point of view of the existing risk management structures as well as the abilities of the various economies to leverage their investment opportunities and growth potentials.

One of the greatest concerns for the Nigerian market is lack of expertise in risk management among insurance practitioners. Risk management among underwriters is necessary, not only because of the potential to earn much higher premiums, but also to support the Nigerian state and protect other assets in the country.

The lack of support for the state in the area of risk management was captured in the remarks by Emeka Akwiwu, Regional Manager for Sub-Saharan Africa at South Africa’s General Reinsurance. He said the Nigerian governments’ annual budgeting of several billions of naira for ecological funds without recourse to underwriters to profile the country’s natural catastrophe and provide a model for risk assessment is a suboptimal practice.

Another area where risk management practices have to be entrenched to improve investment and promote economic growth is in underwriting the special intervention funds that are managed by development finance institutions. A lot of these funds are often disbursed to the intended targets – which are small and medium-scale enterprises (SMEs) and farmers – through the commercial banks. Unfortunately, the expected socio-economic impacts of these funds are often not realised because the insurance structure that should guarantee the funding to SMEs and others is absent.  

The absence of this expertise locally hampers the deepening of insurance and risk services in the country. For example, credit risk insurance (CRI) is one of the most sought-after policies by development banks in Nigeria. CRI is a tool that supports lending and portfolio management and delivers credit risk mitigation in line with banking regulations. But availability of CRI is severely limited in the country.

Another area of challenge is SME financing. One of the challenges of SMEs is not the lack of capital in the financial system or inadequate bankable projects. It is the weak risk management structures and uncertainties regarding how investors can recoup their investment. This challenge must be overcome for the SMEs to truly fulfill their potential of being the engine of economic growth. In this regard, the banks and insurers, the two main financial support systems for entrepreneurs, need to be strengthened with risk mitigation and risk management tools.

One of such tools in the trade space is trade credit insurance, which protects businesses from bad debts by insuring against non-payment by debtors. Trade credit insurance helps in providing better credit lines to businesses. Experts say Letters of Credit are expensive and their replacement with insurance helps in reducing borrowing cost for end-users. Properly structured credit insurance offers borrowers better payment terms while also improving cash flow for the borrowing companies.

The low mortgage penetration in Nigeria can also be addressed if there are more credit risk products available. This will help develop the mortgage and mortgage refinance markets more quickly, faster and more securely.

Notwithstanding the dearth of insurance and risk services, the challenges in the country present opportunities for expansion of risk management and insurance offerings if the appropriate risk management solutions are deployed to give assurances to investors. Eric Omozejele, Deputy Managing Director of IBN Ltd, Nigeria's premier insurance broking and risk advisory firm, expressed this viewpoint recently when he said security challenges in the country present growth opportunities. He assured his colleagues in the risk protection business that expertise can be developed in terrorism and other areas that have presented significant challenges in the country's business environment.

As a specialized African underwriting brand, an organization like ATI can support Nigerian insurance professionals to acquire the expertise to develop best practice in risk management to deepen the country’s insurance penetration and also mitigate investment risk in the country. Nigeria still lacks risk management expertise in infrastructure investment. However, part of ATI’s solutions suite is credit guarantee, which is quite helpful in boosting investor confidence.

With the help of its guarantees, ATI said it has mobilized investments in excess of $1 billion into Tanzania in recent years. The firm recently supported two top-tier Tanzanian banks to issue guarantees for the $1.25 billion, 300km (including 95km sidings/passing loops), high-speed electric railway line for Tanzanian state-run railway firm, Tanzania Railways Corporation (TRC).  A couple of months back, a Turkish firm, Yapı Merkezi, was awarded the contract to design and build this infrastructure project. By September, ATI, in collaboration with Marsh –  a global leader in insurance broking and risk management solutions – structured a $95 million bank surety solution for the construction company to enable it focus on its job of delivering the project.

Apart from allowing Yapı Merkezi to tap domestic Turkish banking lines and take on more project risks, ATI said the insurance structure allows local banks in Africa to take on more risk than their risk tolerance might otherwise permit.

Such an innovative solution can help Nigeria leverage the investment needed to complete infrastructure projects on time. With the right risk management tools, the Lagos-Badagry light rail project, for instance, could have been completed several years ago. Aside from the hardship the project has imposed on people, including destroying property and individual assets, it has been characterised by delays and cost overruns. Almost 15 years after it was announced in December 2003 by former Lagos State Governor, Bola Ahmed Tinubu, the project is yet to be completed.

Compare this to the Ethiopian light rail project that was completed on schedule within its 3-year project duration. Like Ethiopia and Tanzania, Nigeria needs the right partnerships and risk management tools to mobilise substantial investments into the country across all sectors.