By Omoh Gabriel, Business Editor
Last week Frday Professor Chukuma Soludo once again give effect to yet another of his dream. The Lagos session of Africa Finance Corporation. In 2004, when he first announced his dream for Nigeria banks, nobody including the banks the beneficiaries of the dream believed him. He was almost treated like young Joseph in the bible whose brothers sold him for daring to dream that the moon, the sun and eleven stars bowed down before him. Some of the banks fought consolidation with all the arsenal at their disposal and at the end saw that the dream was real and for their good.
This time around, the dream of Nigeria becoming the financial hub of Africa has one of the drivers being supported from the very word go by Nigeria banks which have committed $700million dollars to the project.
According to the Africa Finance Corporation Information Memorandum ‚ÄúThe overall objective of the Corporation is to be a leading private-sector led investment bank in Africa, a development financier of choice and a major contributor to the achievement of sustainable development in the African sub-region. This objective is driven by the need to eradicate poverty in the sub-regions through the provision of an enabling investment/business environment and the bridging of funding gaps in the African region, and propel growth and development.
The Corporation, which is being sponsored by the CBN, mission is to catalyse industrial development in Africa through the provision of loans and other financial services to promote trade, infrastructure development and advancement of energy and extractive sectors of African economics whilst miximising shareholders’ wealth. In addition, the Corporation will facilitate the transfer of capital across borders and stimulate the growth and depth of African capital markets.
AFC will adopt a regional approach in its business focus due to the fact that the infrastructural development problems axe regional in nature; and it also promotes economic integration.
The AFC will have its headquarters in Nigeria and LEKKI, a fast developing Town in Lagos has been tipped by the Central Bank of Nigeria (CBN) to become Africa‚Äôs Financial corridor of the hub in the event of Nigeria becoming the financial hub of Africa by 2020.
Professor Soludo and his Central Bank team were instrumental to the setting up of a financial vission 2020 which hopes to see Nigeria becoming the financial centre of Africa.
This means that if Nigeria‚Äôs bid of becoming the financial hub of Africa becomes a reality, Lekki will serve as the financial service centre for the Africa region where those who have excess dollars, pounds, euro and other currencies can trade them with those who need them for immediate use.
Lekki will thus become what London is to Europe and Singapore to Asia.
What the CBN and others in the dream are seeing is the fact that the core of any hub strategy is to exploit business opportunities at a regional level; produce high-value-added goods and services by bringing foreign capital and technology, world-class multinational companies, as well as specialised professionals into Nigeria. The most critical success factors are access to markets, costs of location as well as of doing business. Others are the degree of liberalisation in policies towards foreign exchange system, opening of legal service market to foreign competition; telecommunications and technology; regulation and taxation as well as availability of quality human resources with apt skills to handle global business. A favorable living environment for expatriates and a strong base of English-speaking, open-minded people are also an edge.
Also to drive the dream of the Lekki financial service corridor is a bill at the National Assembly seeking that 5 per cent of Nigeria‚Äôs foreign reserve be made available to the Africa Finance Corporation for onward lending to private sector operators in the continent for infrastructural development among others.
According Professor Soludo, about $2billion of such money will be available if the bill is passed, as Nigeria‚Äôs foreign reserves has climbed to $47billion
The CBN Governor said that the Africa Finance Corporation which is billed to take off in April 2007, already has commitment from Nigerian Banks to the tune of $700million.
The Corporation has an authorised share capital of $2 billion all belonging to a single class of shares and ranking equally for all purposes.
Broad ownership of AFC is expected predominantly from private sector institutions across African countries. It is expected that the corporation will be 100 per cent owned by the private sector operators in Africa. Professor Soludo said that government institutions across the continent will not be allowed to subscribed to AFC except through their respective central banks which will made to divert their holdings as soon as the private sector operators are ready to take up the shares. This he said is informed by the need to ensure the non interfrernce of government in the operations of the institution.
Consequently, a minimum of 51 per cent ownership is expected by private sector from member countries who are given preference. Africans are thus given the right of first choice to invest in the dream before non Africans. Private sector investment would also be sourced from foreign multilateral financial institutions, banks, High Net worth Individual (‚ÄúHNIs‚Äù) and other institutional investors.
The technical committee for the establishment of AFC (‚ÄúThe Committee‚Äù) intends to have AFC commence business with a paid up share capital of $1 billion. The Central Bank of Nigeria has committed to contribute up to 49 per cent of the paid up capital but if sector operators live up to expectation will not be necessary and a minimum share capital for intending investor is $50,000. The corporation has adopted the United States dollar as its reporting currency.
Conferment with immunities and privileges
The Corporation is expected to sign agreements with its host countries conferring on AFC the
following privileges: immunity from suit and legal process, other than for reasons linked to AFC’s core business of lending and fund raising; inviolability of residence and archives; and; Exemption from taxes and rates.
Plans for expansion
Though at inception, the Corporation will largely focus its operations in West and Central Africa with a view to building critical competencies and provide funding to fast-track the growth of key sectors, it will also look at penetrating neighbouring and other friendly countries with investment potential. In the medium to long term (three years post inception), AFC should have consolidated its operations within the West and Central African sub-regions and would be geared-up to penetrate other viable economies in the rest of the continent. AFC will facilitate its expansion plans by partnering with institutions like LFC, ADB and LDC which already operate on the continent.
The focus of AFC would include private sector-led projects and existing African companies in the key economic growth sector in Africa, such as oil and gas, mining, telecommunications, fast moving consumer goods, agricultural and agro-allied industries as well as infrastructure projects.
Products and services
The investment banking business of AFC will provide project and structural finance and investment banking activities such as corporate finance, mergers and acquisition, capital market activities, equity research and asset management.
AFC will also offer all range of financial products including loans, guarantees, risk management products, equity participation in private-sector led projects and venture capital. In addition, it will provide range of technical and advisory services in support of private sector development in Africa.
Partnership and alliance
A major strategy of AFC according to the information document is the development of market intelligence and critical competencies. In addition the Corporation will seek to convert opportunities through the establishment of strategic partnership and alliances with major institutions under the following categories: Comparable Development Finance and Multilateral Banking Institutions: Alliance with these institutions will be in two dimensions, the first being technical partnerships to ensure the development and transfer of skills, and the leveraging on technology and existing relationships to fast track the penetration of AEC into viable economies. The second is targeted business partnerships/joint ventures to finance large scale and viable projects within the sub-region. Examples of such institutions include ADB, IDC, ELB and IFC; major commercial banks: AFC will partner with major banks operating in the continent in order to facilitate market penetration plans and the packaging of strategic financial deals in the region.
Corporate governance framework
The corporate governance framework includes an effective board of directors; and promotes the protection of shareholders interest, integrity of internal and external audit, robust risk management framework, board and executive management oversight. This framework is designed to ensure continuity and transparent management of the corporation‚Äôs operation through proper segregation of powers and clear definition of roles and responsibilities of the different elements of the governance framework. Hence the governance structure must be such that it promotes investors confidence and positively influences the corporation‚Äôs risk rating.
Treasury and funding
The Treasury and Funding function shall be responsible for managing the Corporation’s funding, liquidity,.capital and relationship with creditors, rating agencies and regulators. In addition, the function will:
structure and execute equity au long-term debt offerings; provide cross-border financial service to clients with respect to export and import finance; allocate capital to the various business units and subsidiaries of the Corporation; create, improve and implement liquidity risk policies; evaluate complex structured transactions and advise senior management on financial risks and other implications; and maintain global relationships with creditors, rating agencies and regulators; and participate in institution-wide strategic projects, with specific focus on financial analysis, capital and risk related issues.
This function will principally be responsible for developing aml implementing the lending policies and procedures of the Corporation. The function will be segmented along target sectors/markets such as:
Agribusiness; Information and Communication Technologies; Manufacturing and Services; Infrastructure; Oil & Gas, Mining and Chemicals
The function shall ensure that the full ambit of risk categories are identified, assessed, measured, controlled and reported. Specifically, the function shall be responsible for: Identifying major issues to be monitored/controlled to keep the Corporation’s risk within
acceptable limits; Developing tools to assist the Corporation in identifying potential risks in order to limit exposure; Reducing portfolio concentration risks and setting of investment risks limits; Monitoring the Corporation’s reputation; Creating awareness of the long term effects of investment decisions; Implementing an integrated risk management system; and Monitoring all material risks.
In addition to risk management; the division shall also be responsible for developing and implementing the Corporation’s internal control framework as well as ensuring its sufficiency in relation IoAFC’s business.
The dividend payout ratio during the forecast period shall be 30 per cent of net income (after reserve appropriations). The balance of 70 per cent shall be retained for reinvestment, to support the Corporation’s growth strategy. It is assumed that dividend payment will commence from the third year.
Estimated Project Cost
Project cost is based on existing industry norms and estimates obtained from various vendors! service providers and also on the expected scale of roll out for the proposed institution.
The development cost represents estimates for the first year of operations. The project cost results in a total capital outlay of approximately US$21 million as presented below:
It should be noted that this estimate is significantly less than the proposed starting equity capital investment of US$1 1 billion. AFC as a financial institution will leverage on its shareholders’ fund to raise borrowing require to create interest-income generating assets.
Revenue. The financial model assumes that AFC will earn the following revenue from its operations:
Interest income from its lending operations; Fee Income generated from the following components: Lending fees; Corporate finance fees; Asset management fees; Investment income on its proprietary investments
Funding and Balance Sheet Structure Assumptions
The two funding sources for the proposed investment bank will be the paid up share capital and borrowings. At inception, the share capital of US$1 billion will be used in financing the project cost of approximately US$20 million leaving an unutilised balance of about US$980 million, of this amount, it is assumed that US$500 million would be used to fund lending operations while the balance of US$480 million will be invested in the financial markets to earn investment income. In subsequent years, 80% of available funds (shareholders fund brought forward from previous year and borrowings) would be lent out while the balance of 20% would be invested in the financial market. In addition, excess cash earned from previous years will also be invested in the financial market.
Projected return on investment
The financial forecasts indicate that the project would have an Internal Rate of Return of 27 per cent.
Thus, based on the financial projections presented, the Project is an attractive investment opportunity, as the cash flows generated by the Project are adequate to recoup the initial investment of US$1 billion at the rate required by investors. Also, the forecasts indicate that AFC will be financially stable with strong, positive cash flows, enabling it to meet its business obligations in addition to the payment of attractive dividends to its shareholders.
Fiscal exemptions, financial facilities, privileges and concessions
The Corporation shall be accorded by each Member State a status not less favourable than that of a non-resident corporation, and shall enjoy all fiscal exemptions, financial facilities, privileges and concessions granted to international organizations, banking establishments and financial institutions by the Member States.
The Corporation may freely and without any restriction, but to the extent necessary to implement its purpose and carry out its functions, set forth in the Agreement: carry on all forms of banking business and financial services; purchase, hold and dispose of national currencies; purchase, hold and dispose of convertible currencies, securities, bills of exchange and negotiable instruments, and transfer the same to, from or within the territory of any Member State; open, maintain and operate accounts in national currencies in the territories of the Member States; open, maintain and operate convertible currency accounts in the territories and outside the territories of the Member states; raise funds and make loans in convertible currencies; and carry out any operation authorized under this Agreement.