What role can Finance play in developing the Nigerian Business Environment? A Case Study of the International Finance Corporation in Nigeria.
What role can Finance play in developing the Nigerian Business Environment?
A Case Study of the International Finance Corporation in Nigeria.
FOR THE COURSE-
SOCIAL, POLITICAL AND ECONOMIC ENVIRONMENT OF BUSINESS (SPEB)
LAGOS BUSINESS SCHOOL, JUNE 2005
BY
FOLAHANMI J. FAGBULE
(MBA/2005/037)
I. INTRODUCTION
IFC Mission-
'To promote sustainable private sector investment in developing countries.'
"The World Bank's role, in my opinion, is to help improve the business environment in the developing countries so that the private sector can drive growth."- Mr. Peter Woicke, Executive Vice President of the World Bank Group (WBG) in charge of the International Finance Corporation (IFC) - Lagos, August 2004.
At the time Mr. Woicke was speaking, IFC involvement in Nigeria had reached $200million in investment commitments, a figure quickly surpassed in less than a year from that date (as at June 2005, IFC investment in Nigeria was to the tune of $290million). This was in spite of the fact that only five short years before (in 1999), IFC was doing practically no business in Nigeria and merely had a functional working office in Lagos. Mr. Woicke went on to say- "We have increased our exposure since democracy returned from almost nothing to almost $800 million and an exposure at the IFC of about $200 million. We have made a bigger bet to have the bank (WB) and the IFC work on Nigeria's problems together. We were quite instrumental in advising the government on reforms in the telecom sector. We have been pushing very hard for privatization of other sectors."
Clearly, the advent of democracy had re-ignited interest in Nigeria. The initiation of a reform agenda by the new government was also playing a part in this renewed interest in Nigeria. Beyond financial commitments however, IFC was beginning to offer a great deal of other services towards developing the economic environment of business in Nigeria. As Mr. Woicke put it- "I actually think we should increase our presence quite (in Nigeria) dramatically. We don't necessarily want to lend tons of money to Nigeria, because Nigeria has lots of resources. We can contribute in terms of providing advice, transferring technology, providing technical know-how in social, environmental and corporate governance issues"
Indeed, the nature of IFC operations globally and increasingly in Nigeria were such that contribution was becoming greater in terms of technology, advice, social development, environmental assistance, corporate governance and ethical issues, and global competitiveness concerns. IFC had begun to realize that their market, and indeed their business model had reached a pivotal moment wherein clients had begun to expect more than just project finance deals and long term syndications.
Governments were asking for help on private sector issues that went far beyond privatization or concession structuring. There had arisen a case for IFC involvement as much in the Economic as in the Social, Environmental, Technological, Global and indeed perhaps ultimately- Political Environment of Business.
II. IFC- HISTORY AND EVOLUTION
The International Finance Corporation (IFC) was founded in 1956 to cater for economic growth and development of the economies of member countries by promoting private sector development. IFC is a member of the World Bank group, which includes the International Bank for Reconstruction and Development (IBRD) otherwise known as World Bank, the International Development Association (IDA) and the Multilateral Investment Guaranty Agency (MIGA). IFC is a legal entity, separate and distinct from the World Bank, IDA and MIGA. Launched with 31 members, IFC had 175 member countries by June 2001. It made its first investment of $2million in Brazil (1957) and by 1984, had capital in excess of $1billion. In Africa, IFC launched its African Enterprise Fund to finance Small and Medium Enterprises in 1988. By 1996, syndications had reached $4.8billion and environmental and social policies were being strengthened. In 2000 IFC achieved a new record for investments in sub-Saharan Africa ($1.2billion). In June 2005, IFC's stated mission was "to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people's lives."
III. IFC- OPERATIONS
Regional and industry sector departments manage IFC investment operations.
The industry departments manage projects within their respective sector globally, regardless of which region the project is located in while the regional departments manage projects in their respective geographical area in sectors that are not covered by an IFC industry department. Most projects managed by the regional departments are in the broad areas of general manufacturing and financial services and markets.
IFC also has jointly managed departments with the World Bank in industries where there are strong interfaces between policy and private investment transactions. The departments are: Corporate Governance; Global Information & Communication Technologies; Investment Climate; Oil, Gas, Mining & Chemicals; and Small and Medium Enterprises. 2004 operating income for the IFC group was $982million, with a 23% increase in new commitments. New investments in Sub-Saharan Africa more than doubled in 2004 with a spread of business distributed across all sector. By June 2005, Nigeria had become the largest location of IFC exposure with over $290million invested. South Africa was second largest with $225million. As was stated earlier, recent developments in Nigeria (1999-2004) were responsible for these increases.
However, Nigeria had not always been such an attractive destination for International finance.
IV. NIGERIA- HISTORY AND ECONOMIC EVOLUTION
Nigeria, situated on the west coast of Africa is home to an estimated 125 million people, (National Planning Commission, 2001) of 200 ethnic nationalities who occupy 98 million hectares of land (an estimated 76% of which is arable) and speak 500 different languages.
Prior to independence from British Colonial rule in 1960, Nigeria had developed an agricultural economy that was linked to global trade in commodities like cocoa, groundnuts, palm produce, and extractive minerals like tin. ...
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However, Nigeria had not always been such an attractive destination for International finance.
IV. NIGERIA- HISTORY AND ECONOMIC EVOLUTION
Nigeria, situated on the west coast of Africa is home to an estimated 125 million people, (National Planning Commission, 2001) of 200 ethnic nationalities who occupy 98 million hectares of land (an estimated 76% of which is arable) and speak 500 different languages.
Prior to independence from British Colonial rule in 1960, Nigeria had developed an agricultural economy that was linked to global trade in commodities like cocoa, groundnuts, palm produce, and extractive minerals like tin. Commodity boards organized activity in these industries but were known for policies that transferred wealth from the rural farmers to the urban political elite. This notwithstanding, there was steady growth during this period (average annual real GDP growth rates were about 5%).
With self-government and subsequent independence however, came policies of import substitution industrialization and the depletion of the huge Commodity Board accounts that existed at Independence. Civil War between 1967-1970 and the discovery of Crude Oil in commercial quantities heralded an era of Big Government during which government sought to control economic activity in virtually every sector. These developments were further encouraged by huge upsurges in Crude Oil prices and the consequent evolution of a massive import economy supported by the highly valued local currency. Exports became unattractive and the economy became entirely dependent on oil income and government patronage. However, when oil prices crashed inevitably in 1982 without a commensurate crash in the demand for imported goods and the governments expenditure profile, drastic economic measures had to be taken. The short-lived Structural Adjustment Program sought and managed to eliminate some of the inconsistencies that constituted the Nigerian Economic system. However, the prolonged political crisis of the 1990's led to a long period of continued military misrule and economic stagnation. The advent of democracy in 1999 was thus a great opportunity for stability, growth and reform. By 2004, certain benefits of liberalization and privatization based reform had become evident and efforts were being made to speed up the reform process in the country. It was thus within these Social, Political and Economic conditions that IFC sought to achieve its objectives in Nigeria.
V. IFC WITHIN THE SPEB FRAMEWORK
IFC operates (globally and in Nigeria) within a framework that places great emphasis on 'Socially Responsible Investments', amongst other key Investment challenges. As part of its goals, IFC seeks to achieve sustainable business assistance by making highly selective, strategic interventions in key sectors of the market where demonstrating such business practices offers significant benefits. To do this IFC operates the Corporate Citizenship Facility, the Environmental Opportunities Facility and the Sustainable Financial Markets Facility, amongst other tools for achieving its objectives. Thus, among the criteria for IFC financing are several non-core finance issues ranging from Social benefits, to Environmental assessments as well as Ethical and Corporate Governance requirements.
In Nigeria for example HIV/AIDS awareness, control and management issues are a great priority for IFC in all its investment decisions, as will be illustrated later in this report.
In making its investment decisions, IFC typically carries out Return on Investment analysis that takes into consideration the ROI from a Social, Political, Economic, Legal/Institutional, Ethical, Technological, Global and Environmental point of view. Hence various investments, to varying degrees have impacts that extend beyond the financial to one or more of these other realms. Nigeria is no exception to this rule, even though a lot can still be achieved in certain respects within the Nigeria environment. In particular, IFC Environmental Financing Capabilities, typically geared towards achieving environmentally favorable investment returns are sorely needed in the Nigerian Oil producing areas where Environmental degradation has become the norm.
IFC efforts here would as always signal to the rest of the industry that such practices are indeed profitable and sustainable, leading perhaps to increased industry acceptance.
Surprisingly, IFC executives say that the Legal and Political environment is not an area out of their purview. In this regard, they insist that regulations, laws and policies that will favor business in Nigeria are constantly being formulated, in conjunction with the World Bank and made available as presentations to government for consideration. In this regard, the pressures on government to institute a Bond Market and an enabling law for the Leasing Business in Nigeria are examples of IFC involvement as a political pressure group in the country. Also IFC is at the forefront of calls for an enabling environment for business in Nigeria. In this regard, they champion the cause of the small and medium enterprises for infrastructural and other reforms. However, there seems to be a strong leaning in IFC towards complete displeasure at government's protective tariffs or outright bans also intended by government to be beneficial to local industry. The key argument here is that protectionism will never yield a globally cost competitive industry.
VI. IFC IN NIGERIA
STRATEGY-
IFC strategy within Sub-Saharan Africa seeks to support comprehensive development primarily through developing small and medium enterprises with the knowledge that these are the major drivers of growth. To this effect, an SME capacity building facility has been developed with over 117 pilot projects in the last 4 years. More significantly, the donor sponsored Africa Project Development Facility (APDF) is being re-organized into an IFC sponsored program known as the Private Enterprise Partnership Africa (PEPAFRICA) due for launch on June 30, 2005.
GDP growth rates for Africa were found to have reduced from about 3% in the two years prior to 2004 to about 2.4% in 2004, far below the 7% growth required to meet the Millennium Development Goals of poverty reduction. Hence, total commitments in Sub-Saharan Africa increased to $405million for IFC accounts. The strategy is to expand service availability to smaller businesses while larger projects are being supported at formative development stage with Finance and Corporate Governance support
In Nigeria, IFC strategy in the two broad directions mentioned above has been very evident. However, IFC has augmented its Nigeria strategy such that it is no longer a direct provider of Finance to SME's. It observed over time that servicing such facilities to an SME would involve services that are better provided by local commercial banks. Hence, the Lines of Credit it began to extend to various commercial banks for on-lending to businesses. However, advisory services and other support services continue to be available to SME's through APDF and now PEPAFRICA.
PRODUCTS-
IFC's main services are:
* Equity and Quasi-Equity
* Loans and Intermediary Services
* Syndicated Loans
* Structured Finance
* Risk Management
* Technical Assistance and Advisory Services
PROJECTS-
IFC in Nigeria currently has commitments in excess of $300million, as against the $290million for FY04. Exhibit 1 is a list of IFC projects at the moment. These are projects with outstanding equity and debt commitments. Various other projects exist with expired debt or equity, which are no longer on IFC books.
However, some of the major projects at the moment are evaluated here from a SPEB perspective. Exhibit 2 is a typical IFC published Summary of Project Information (SPI) illustrating IFC approach to these projects. A SPI exists for every IFC project in Nigeria and worldwide.
* Commercial Banks Credit Lines-
As mentioned earlier, as part of its development strategy aimed at SME development, IFC began to make Lines of Credit available to several reputable local Nigerian financial institutions for on lending to local businesses. The underlying assumption here is that such Banks are in a better position to lend, monitor and recover credit made available to smaller businesses in the less than $5million range that the IFC considers below its lending capacity at the moment.
Diamond Bank, Citibank, Guaranty Trust Bank (GTB), FSB International Bank, Investment Banking Trust Company (IBTC) and United Bank for Africa (UBA) were some of the Banks that received about $100million for this purpose. GTB has since become a revered 'repeat customer' for IFC by taking up further facilities in this regard.
As part of the Loan agreements, IFC executives say that they have put in certain limited checks to ensure that these funds get used for the appropriate purposes. However, they say they are limited in setting checks because the Banks take full responsibility for the lending risk and hence cannot be dictated to in terms of whom they should lend to. IFC has however been known to refer promising entrepreneurs that have APDF support to the Banks for possible lending.
The potential for economic environment impact in this instance is not hard to imagine. Nor is the potential trickle down effect on job creation, citizen health/well being and other social implications. On the one hand, these long-term loans are available at low, dollar based Interest rates to the Banks (LIBOR plus, actual rates not available) who thus have funds available for longer-term business with their own customers. This allows for planned, job creating, non-trade based business to grow in the country. The jury is still out however as regards the magnitude of impact of these lines on SME's as expected by IFC.
* ACCION Microfinance-
ACCION Nigeria is a global Microfinance based lending institution that is beginning micro lending business in Nigeria with IFC support. They aim to provide low cost credit to entrepreneurs at the lowest level of credit requirements in the economy. Here, facilities of as low as $100 will be available in 'stepped loans', designed to increase loan size in steps as lenders pay back earlier receipts. The strategy is to encourage organized entrepreneurship at even the lowest levels of trade and commerce in the economy.
The potential social implications of success in this regard are enormous as small time traders and business people begin to get access to the finance and business support services of world-class organizations like ACCION and IFC.
* Nigeria Trade Enhancement Facility-
This is an IFC supported facility, provided in the first instance by Standard Chartered Bank of South Africa to the tune of $20million to increase confirmation limits available to local banks that are otherwise constrained due to country exposure limits. Nigeria, in spite of being the third largest importer on the continent (after South Africa and Egypt) is constrained by the limited credit lines available to local banks on account of past economic mismanagement. This facility seeks to address that imbalance.
* Dangote Obajana Cement Factory-
This facility was extended in consistence with IFC strategy for Africa regarding major capital investments. In this respect, IFC is moving to support Dangote as a potential exporter of cement and a contributor to national business and economic development with an up to $75million syndicated loan agreement.
This project illustrates IFC commitment to simultaneous Social and Economic development. The project has been chosen as an opportunity to carry out aggressive HIV/AIDS awareness campaigns in unison with a project development effort. Hence, this complex structured complex finance deal is accompanied by a detailed HIV/AIDS prevention and management program for the Obajana Community of over fifty thousand people. The objective is to use this as a case study for community based HIV/AIDS awareness, prevention and management programs. Progress was on going in this regard as at June 2005. Besides, the various infrastructural development contents of the overall investment are designed to develop the Obajana area to a great degree. (See Exhibit 2 for SPI).
* MTN Nigeria-
IFC has provided funds ($100million) as Loan and Equity ($85million and $15million respectively) to MTN Communications Nigeria, a leading telecoms operator in Nigeria. MTN started operations in 2001, winning one of three new 15-year licenses in the country. This investment is in line with the strategic objective of rapid, non-oil, and private sector-led growth in the country. IFC says its investment in this project is to promote competition in the cellular market in order to lower tariffs, improve service quality and responsiveness to customers, and expand access to communications: objectives that are all being met at a very rapid rate in the country. By June 2005, MTN had announced a subscriber base size of 6million Nigerians, beginning to dwarf even its parent company MTN South Africa (75 per cent owners).
Partial ownership of the company by IFC through the aforementioned equity participation is illustrative of IFC commitment to achieving best practices in Corporate Governance in the country. IFC thus maintains a seat on the board of the company as an observer and active agent for ethical practices in MTN business practices as a model for the rest of the industry and business community.
Furthermore, the multiplier effects of a fast growing telecommunications industry (70% growth in telecoms contribution to GDP from1999-2003) are increasingly evident in the Nigerian Economy as new jobs are being created- formally through direct employment/involvement in the sector, and informally through phone centre operatives, recharge card vendors and many others.
* Niger-Delta Contractor Revolving Facility-
In FY02, $15million was made available as IFC loans to local contractors that were able to secure contracts from oil companies operating in the Niger-Delta but were unable to finance execution. The objective here was to ensure that technically competent local business people are not denied the ability to compete in this key, capital intensive sector that has been termed an 'enclave' sector on account of the lack of a significant connection between activity in that sector and the rest of the economy.
* Anambra State Cluster Development Project-
IFC states its objective here as being: to improve the performance of small and medium size enterprises in the clusters in Abia and Anambra states (Eastern Nigeria) through policy reform, more efficient horizontal and vertical firm linkages, and expanded access to business development services and financial resources.
This initiative began in 2002 (Phase 1) and has implementation components in the Business Environment area, the Business Linkages and Enterprise Support Services area, and the Micro and Small Business Finance area. The project is divided into two phases. Phase 1 will cost $350 000, with IFC providing $100 000, UNIDO: $250 000. The APDF will provide support services. Phase 2 is estimated to cost $3.5million. ACCION will also be involved in this phase, which began in 2003 and is expected to last till 2006.
Progress is on-going in this regard but results are already being seen in the areas of capacity building, private-public sector dialogue, technical skills development, the common facility center for leather products (Aba), business networking/cluster coordination, and finally, lending and business support services.
* Lagos Business School-
Enhancing the capabilities of African business schools to train local management graduates is critical for development and improvement of the investment climate-
Mr. Guy Pfeffermann, former chief economist of IFC and director of the GBSN.
IFC operates GBSN (Global Business School Network), an initiative that seeks to enhance management skills in emerging markets by partnering with business schools to build local capacity for management training. GBSN harnesses the experience of several of the world's top business schools in support of institutional capacity building for African business schools. Strengthening these business schools will deepen and widen the pool of well-trained local managers who play a crucial role in generating jobs, reduce reliance on expatriate managers, and help stem brain-drain. GBSN pilot programs are with the Lagos Business School in Nigeria, the Ghana Institute for Management and Public Administration and Kenya's USIU. GBSN is also helping the World Bank's International Development Association in support of Ethiopia's major business school.
IFC executives at the Lagos office echo Mr. Pfeffermann's statement when they say that local managerial ability is one of the biggest challenges they have found doing business in Nigeria. Contrary to popular perception that Government inaction and infrastructural inadequacies are the only issues hindering private sector development in Nigeria, IFC executives say that they have been significantly challenged by the lack of capacity and often lack of willingness to imbibe management best practice by entrepreneurs in Nigeria.
IFC is thus in alliance with the Enterprise Development Service (EDS) of the Lagos Business School towards building local managerial capacity for business development. The objective is to get more fund-seeking entrepreneurs to begin to observe international standards in business practice whilst receiving business support services and perhaps financing. This is with a view to achieving a more sustainable development objective as opposed to mere financial transactions. This will no doubt have multiple social and economic effects on local businesses and the larger economy. Meanwhile, LBS is said to be in continuing talks with the IFC towards obtaining donor funds as opposed to IFC loans for its expansion programs. Progress in this regard was on-going as at June 2005.
VII. IFC PERFORMANCE EVALUATION FRAMEWORK
IFC maintains an independent Operations Evaluation Group (OEG), a critical mechanism for assessing its broad global developmental objectives. A study of this mechanism was considered essential for this case since it would be pointless for IFC to continue operations without a constant, credible assessment of its performance relative to stated objectives.
The Director of Operations Evaluation Group (OEG) is responsible for the operations evaluation function within IFC.
OEG's independent evaluation work encompasses:
. Programs, investment projects, advisory and technical services, and the strategies, policies and procedures that relate to them with particular attention to the achievement of agreed objectives for private sector development and the effects of investment activity.
2. Assessing the quality and usefulness of IFC's evaluation processes and products, and participating in the formulation and continuous improvement of appropriate evaluation policies, practices and instruments.
3. Identifying and disseminating lessons and making recommendations drawn from evaluation findings to contribute to improved operational performance, accountability for results, and corporate transparency.
This is typically achieved within an evaluation framework that is once again illustrative of the strength of IFC within the SPEB framework. The framework evaluates:
Private Sector Development-
A positive effect in creating sustainable enterprises capable of attracting finance, increasing competition and linkages, or bringing about improvements in the regulatory environment.
Environmental Impact-
IFC environmental, social, health and safety requirements.
Economic Sustainability-
Acceptable economic returns to society, taking into account net gains or losses by nonfinanciers, nonquantifiable impacts, and contributions to widely held development objectives.
Project Business Success-
Returns equal to or greater than the project cost of capital (in the real sector) or, for projects in the financial sector, sub-portfolios that contributed to the intermediary's profitability, financial condition and business objectives.
The year ended June 2004 saw IFC achieving success rates to the tune of 72%, 64%, 61% and 39% respectively in its global operations as regards the above criteria.
Success rates for Nigeria alone were not available as at June 2005. It seems clear from the foregoing that IFC performance with respect to project business success is quite unsatisfactory even when the difficulty of satisfying this criterion as part of the larger evaluation framework is recognized.
VIII. CONCLUSION
This case attempts to illustrate with many examples drawn from IFC practices, the potential for finance as a veritable tool for development within the Social, Political, Economic and Business Environment. A further learning point is the realization that such development need not be at a loss, that a business case exists for social development, a fact clearly proven by IFC but which is yet to be adopted as global best practice.
Other developmental finance organizations would do well to learn from this. But even more than that, the challenge is there for profit making businesses to begin to seek creative means of contributing to SPEB development whilst creating shareholder value. This is quite possible if appropriately factored into an organizations strategic mission and plan. IFC in Nigeria provides various learning points that can be incorporated into a company's strategy for profit making within a developmental framework.
By June 2005, Mr. Andrew Alli, IFC County Manager for Nigeria was simultaneously coping with the challenges of doing business in Nigeria, and the results of having elevated Nigeria to the status of IFC largest business centre in Sub-Saharan Africa during his tenure. As his term in Nigeria drew to a close, he was pondering on what the future held for Business in Nigeria, for IFC in Nigeria and for the continued Social, Political and Economic development of the Nigerian Business Environment.