• Wednesday, June 19, 2024
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BusinessDay

Can the government point the way to the long term?

Wale Edun’s economic reforms: A blueprint for alleviating Nigerian suffering

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 meeting of that week approved a proposal to let the government tap into billions of Naira pension savings to develop critical infrastructure and aid mortgage financing for mass housing development in Nigeria.

The announcement immediately drew a storm of protests; even the labour movement gave a warning that they would not support any attempt to use workers’ hard-earned pensions” by the government.

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One thing was obvious from the protest: many of those who took this stand did not question what the proposal was really about or how it would affect them. Many assumed the government was just going to allocate some of this pension money to these projects; this was a very wrong assumption. The government cannot and will not be able to do this, no matter how hard they try. The rules guiding the pension industry will not allow them.

The Minister has since come to clarify his statement, making it clear that the proposed direction is to work within the rules to make this veritable source of long-term finance work better for the economy.

Pensions are for long-term investment.

Pension funds make sense when they are invested for the long term with consistent cash-flow returns to meet pension obligations as they fall due. Keeping pension funds in savings without growing will not achieve the goal of making pensions a sure source of retirement income for pensioners.

Many long-term fund managers are already complaining that there are not sufficient long-term investment outlets for long-term funds in Nigeria today. There is a limit to investment in our stock market; it is too small and relatively risky. 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 fund investment in Nigeria; it is tilted to the short-term investment end and primarily in government securities.

The high interest rate environment in Nigeria has helped most pension funds earn high returns to be able to meet their obligations and remain profitable for now. This situation will change as the pensions grow from the share weight of enrolling more people, and pressure will also 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 to absorb the flood of pension deductions that are coming and the returns to meet upcoming obligations.

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Any sudden correction in interest rates will also mean lower returns for 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 from short-term investments.

The discussions should focus on how this proposal to tap into the Pension Fund’s huge savings will be done without allowing reckless use by the 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, when we were trying to create “a yield curve” for the market, with the help of the International Finance Corporation (IFC), the market came together, with the government showing the way, by issuing long-term bonds. We now have 30-year, 10-year, and 5-year 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 were 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 that 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. The housing market, if well played, will move us faster to the $1 trillion 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 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-led infrastructure project’s 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, the cost of the project is not bloated, and delays to delivery are minimised.

The government’s best options for attracting infrastructure development financing will be to use government guarantees to back foreign investors doing commercial infrastructure projects.

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Where they will build, operate for an agreed-upon period to recover project costs plus a profit and sell assets back to the government.

The government can also issue bonds, backed by the government, for specific infrastructure projects that private investors can buy.

If we focus on the way the government directs pensions to invest in long-term infrastructure projects but do not directly borrow from pensions, we will be on our way to properly use 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 long-term asset managers while also calculating 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.

The government has in the past successfully partnered with the private sector in Nigeria for development.

The best example of this is the Nigeria Industrial Development Bank (NIDB). The NIDB was literally 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 the ICRC (the Infrastructure Concession Regulatory Commission) to draw up a programme for identified priority projects in the country, like the Calabar-Lagos Railway, with detailed plans and invite concessioners. Some of these projects can attract financing on their own if the government’s role is to provide guarantees only.

Those who say it is too risky to allow pension funds to invest in government securities don’t realise that over 70 percent of pension fund earnings now come from government securities. Besides, the government is the benchmark for risk rating in any country. So, the perceived risk is much lower than we think.

 

Victor Ogiemwonyi is a retired investment banker and writes from Ikoyi, Lagos.