Can Nigeria’s Government Point The Way To Long-Term Investment?

By Victor Ogiemwonyi
During the past week, the Minister for Finance and the Coordinating Minister for the Economy, Mr Wale Edun, revealed that the Federal  Executive council at its meeting of that week approved a proposal that would allow the government tap into pension savings going into billions of Naira for the development of critical infrastructure, including mortgage financing for development of mass housing in Nigeria.
The announcement immediately drew a storm of protests, as would be expected, even as the  labour movement issued a warning, that it will not support any attempt by the government to to “use workers hard earned pensions.”
One thing was obvious from the protests. Many of those who took this stand did not question what the proposal is really about and  how it will affect them.
Many assumed that government was just going to allocate some of these pension money to these projects. This was a very wrong assumption. Government can not, and will not be able to do this, no matter how hard it tries. The rules guiding the pension industry will not allow such.
The Minister has since come to clarify his statement, making it clear that the proposed direction is to work within the rules and ensure this veritable source of long-term finance works better for the economy.
Pensions are for longterm investment. Pension funds make sense when it is invested for long-term vehicles with a consistent cashflow returns to meet pension obligations as they fall due. Keeping pension funds in savings accounts without growing it will not achieve the goal of making it a sure source of retirement income for Pensioners.
Many long-term Fund managers are already complaining that there are no sufficient long-term investments outlets for long-term funds in Nigeria today. There is a limit to investment in our stock market which is too small and relatively riskier. Even the current recommended allocation for Pension Funds to invest in equities is frequently not met.
The short term nature of our Pension Fund investing is already seen in the structure of Pension Funds investment in Nigeria. It is tilted towards the short-term investment windows- majorly in government securities.
The high interest rate environment in Nigeria has further helped most Pension Funds in Nigeria earn high returns, thereby helping them meet their obligations and remain profitable for now. This situation will change as the pensions grow from share weight of enrolling more people and also pressure will come as more people reach pensionable age and the pension obligation payments increase massively.
This is the time to plan for those safe long-term returns  that the Pension Fund industry will need for absorbing those flood of impending pension deductions and returns to meet up coming obligations.
Any sudden correction in interest rates will also mean lower returns from Pension Assets. We should prepare for this reality. There must be compensating stable, long-term returns from long-term investments to replace the high short-term returns, they get now on short-term Investments.
The discussions should focus on how this proposal to tap into the Pension Fund huge savings that will be done without allowing reckless use by government.
Creating long-term market Assets, that Pension Funds can invest in, is what I think, the Minister was talking about.
They are showing the way to the Long-term.
Sometimes, the Government has to show the way. I remember, a few years ago, we were trying to create “ a yield curve” for the market, with help of International Finance Corporation IFC, the market came together, with Government showing the way, by issuing long-term Bonds. We now have a 30year, 10year and 5year Government Bonds to build the yield curve on.
From what I hear from the Minister, and his  specific pointer to Housing and Mortgage Finance, i think, this is the way to go. If the Government was to create Housing Finance institutions like Fani Mae ( Federal National Mortgage Association – FNMA)  and Freddie Mac ( Federal Home loan Mortgage Corporation -FMCC) of the United States.
long-term market Assets can be created on the back of these. No one can say, Fani Mae and Freddie Mac are not good models to copy.
Both institutions are Government sponsored Enterprises, created to ensure access to Home mortgage credit. They have the statutory mission to provide, liquidity, stability and affordability to the US housing market. They are also profitable.
We can do the same here, to rapidly close the housing gap in our economy, while unleashing other opportunities in the economy. The Housing market if well played, will move us faster, to the $1trn GDP economy the Tinubu administration has pledged to deliver in this decade.
The resulting investment opportunities will give pension Funds and other long-term Fund managers, investment Assets that will provide in the long-term, stable returns they need to meet their long-term obligations.
Let’s be realistic, Government Budget allocations, can never be sufficient to  provide for the huge deficits in our infrastructure requirements.
We must create opportunities for the private sector to come in as partners. Imagine the additional benefits of a private Sector lead infrastructure projects development, It is most likely to be done, more efficiently, because they will have their money in the projects and will ensure, proper contractors get the jobs, cost of project is not bloated, delays to delivery, is minimized.
The Government best options for attracting Infrastructure development financing, will  be to use Government Guaratees to back, Foreign Investors doing commercial infrastructure projects.
Where they will  build, Operate for an agreed period, to recover project cost plus a profit, and sell Asset, back to Government.
The Government can also issue  Bonds, backed by Government, for specific Infrastructure projects, that private investors can buy.
If we focus on the way Government directs pensions, to invest in long-tem Infrastructure projects, but do not directly borrow from pensions, we will be on our way to properly, using this huge source of long-term finance, to kill two birds, with one stone. We will be providing long-term investment outlets, for Pension Funds and other such long-term Asset managers, while also catalyzing the finance needed to build our infrastructure. This way, pension Funds, will be making independent decisions, they will succeed or fail in their credit decisions.
Government has in the past successfully Partnered, with the private sector in Nigeria for development.
The best example for this is , the Nigeria Industrial Development Bank ( NIDB). The NIDB literarily built with private sector core entrepreneurs, the early breweries, Bottling Companies and the Textiles industry. The success was very visible in our earlier industrial development drive.
I will suggest that the Government direct ICRC ( the Infrastructure Concessions Regulatory Commission) to draw up a programme, for identified priority projects in the country, like the Calabar – Lagos Railway, with detailed, plans and invite concessionaires. Some of these projects can attract financing on its own, if the Government’s role is to provide Guarantees only.
Those who say, it is too risky to allow Pensions Funds invest, in Government securities, don’t  realize that over 70% of Pension fund earnings now , come from Government Securities. Besides, Government is the bench mark, for risk rating in any country. So, the risk perceived is much lower than we think.
Ogiemwonyi is a retired Investment Banker, and writes from Ikoyi, Lagos.