The former Managing Director of Frontier Capital, Olufemi Edun provided an insightful tour de force of the intricacies of financing and managing big infrastructure projects and investments. He provides rich historical and political contexts to such projects in Nigeria. He also has an important commentary on development policy towards the end of our conversation.
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Tobi: Welcome to Ideas Untrapped and today I am on with Mr Femi Edun. Femi Edun is the former Managing Director of Frontier Capital Limited. You're welcome.
Femi: Thanks very much, Tobi.
Tobi: One thing I first want to discuss with you is public-private partnerships in the finance of big infrastructure projects like monumental projects or special economic zones or ports. What really are the barriers to making them work and why haven't we seen some kind of explosion in its impact in Nigeria?
Femi: Perhaps I should start by telling a story. Last August, I was in Togo meeting with the top executives of one of the largest fashion brand companies in the world, and they are considering setting up multisite manufacturing operations in west Africa to support their global business. And they said, "we just want to get comfortable with all the countries that we are planning to locate in". They were in Togo at the invitation of the Togolese president who had met with them in London, as well as in China - and he said, you know, doing large projects and making large investments in a country is like getting married.
Femi: So first there has to be a courtship, and these days smart countries are the ones that go out courting investors and then we get comfortable. And when we get comfortable, then we get married. Because we're going to business together for a long time, and a major investment - whether by a domestic investor or a foreign investor, it doesn't really matter...a major investment like that is in a sense like a marriage. So why are we not getting married in that space? It's a number of things. I think we need to be a bit more deliberate and systematic in our messaging and in the signals that will send out to investors. So on the one hand, we're telling investors that they are welcome and their investments will be protected, on the other hand, they are seeing examples of activity that may suggest that that is not exactly the case. And certainly as far as foreign investors are concerned, one of the things that foreign investors will tell you is that they want to see how a country has treated its local investors in the process of making decisions about whether to invest or not. Then beyond all that, in making the investments, is there a smooth seamless process (going) in these investments? What are the rules, are they well-known upfront? How much work has the government of Nigeria done? Has the public sector side demonstrate its readiness to investors?
With all of these projects, usually, there's a significant amount of project preparation that has to be done in order to demonstrate, at least, in an outline and preliminary way the viability and the desirability of these investments. We need to be very clear about the legal and regulatory regime. We need to be clear about how the relationships are likely to be structured. We need to be clear about the extent to which investors will have protection for their funds. These are some of the areas that we need to improve. So we have an Infrastructure Concession and Regulatory Commission, the ICRC, that does a great job, led by very good people. The CEO there is an ex-Shell executive who's got an engineering background, worked on large projects, he knows how the world works. And there are some excellent people working within the ICRC. But beyond navigating ICRC, there's the whole question of how you just deal with the octopus that Nigeria can be - lots of regulation, there are lots of government agencies and entities that have some form of oversight or some form of regulatory role to play in these projects and we've just got to be able to do a better job of bringing all those things together in one place. And it goes beyond lining up 26 agencies in a hall and saying that it's a one-stop-shop. It really goes beyond that. We really need to be a lot more joined-up in the public sector in terms of how we approach the private markets for capital for these projects.
Tobi: Is it a failure of communication because interesting thing you mentioned... you can have the Ministry of Trade and Investment that is trying to bring investment into the country courting investors and all that, and you can also have an example of a regulatory agency that is more or less standing in the way of growth for a fledgling sector or industry, so what could better improve this synergy in communication to present a common agenda on the investment front?
Femi: Again, I'm a great believer in the power of stories. Let's go back to two examples. Nigeria is a country of interesting paradoxes because one of the most successful PPP entities in the world is in Nigeria.
Femi: Nigeria LNG is one of the best examples that you can find globally in the area of public-private partnerships. That's something that was constructed very very carefully to create alignment between Nigeria and the international oil companies (the IOCs) in the process of trying to exploit our gas resources. Now, if you remember the history of Nigeria LNG, it took a while... it took a number of years for it to actually come out of the ground and become operational. But I think one of the key messages there is that there was a very careful and deliberate process of creating alignment between the public and the private sectors. The public sector being [the] government of Nigeria (the NNPC), the oil industry, at least, the publicly owned oil industry in Nigeria and IOCs who brought in management and capital of this project. So we brought our gas, and for that we got equity. The IOCs brought cash, the knowhow, the management expertise to run these multiple projects over several streams that represent the company to create what is the largest fleet of LNG vessels in the world, to build a company that has paid billions of dollars (tens of billions of dollars) to government in dividends over the years. So beyond communication, I think the real point is working hard to ensure that there is alignment; that's something that we hear a lot in investing, in private equity, in principal investing, in any type of investing where partners are involved - it's critical for you to have alignment between the partners, that's why the analogy of marriage is such a powerful one when you're thinking about PPP projects in Nigeria. So, yes, just as you need communication to make good marriages work, you need communication to make good PPP projects work. That communication is even more critical early on whilst you're trying to find the partners and whilst you're trying to create alignment.
Femi: It's not exactly a PPP project but the process by which we conducted the auctions for the GSM licences that brought private companies coming in to take spectrum from government in what was acknowledged as an open, fair, transparent, very professionally managed process is certainly one of the high points in the history of Nigeria in terms of attracting foreign direct investment; and if we just apply those lessons on a consistent basis to the things that we do, take time to be very clear about our objectives, take time to make sure that we communicate those objectives very clearly, design a playing field, level it, and make it open and use sensible criteria to determine the sorts of partners that you want. One of my old bosses always used to say that one of the things that's important for you to do in life in building a business and selling a product or services is to define your target market clearly.
Femi: Even going into partnerships like marriages you've got to be very clear about it. So we were clear that we wanted investors that had experience in deploying telecoms networks internationally, that had experience in working with the manufacturers, that had experience in rolling out the technology, also evidence of a particular capability to make these things work and that's why we got the results. So if we follow these sorts of processes and we make sure that they're run properly, openly, by people of integrity, then we'll get the results that we're looking for. So we have great people in the ICRC, they are credible, they have character, what we need to do is just add the other bits, then just get our signalling right as a country, get our priorities right as a country and start singing off the same hymn sheet.
Tobi: Since we're on the subject, maybe you can help me untangle one puzzle that has personally haunted me for years and I haven't been able to get a good answer. What went wrong with Tinapa? This was a project that had so much promise, there's so much investment and, of course, we've gotten a multitude of answers... some will say "oh, it's because government didn't build the port" or "Calabar did not have the natural advantages" blah blah blah, in your own opinion, what went wrong with that project and would you say we have learnt the lessons from some of our failures?
Femi: Well, you're right when you say that, you know, depending on who you talk to, you'll probably get many answers as questions to the question of what happened to Tinapa. In my view, from the perspective of an interested bystander, in the sense that I was somewhat involved in the credit rating process of the project financing that went into that. And I certainly was involved from just my interest in governance and political economy. But my view is that like most other project financings, when a project has lots of externalities - in this case, things like dredging, modernization of the ports, improvement of road, air, infrastructure going into Calabar - were outside the role of sponsors, Cross Rivers state and their investment company. When you have those sorts of things and those who were involved are not tied into the financing themselves with clear obligations in order to make the project go forward. Tinapa was a great project, an interesting location but if they had put it, perhaps, closer to the existing infrastructure in Lagos even as poor as it is and as stretched as it is currently, maybe they would have had a better chance of success. But you see I think one of the issues there is that we've got to realise that it's important for a country of this size for us to, if you like, democratise the development of infrastructure. We roll it out, so that we reduce the pressure on Lagos. But Tinapa was a few years ahead of its time and it was also a victim of externalities that were outside the control it's [indistinct word].
Tobi: Would you say we have learnt the lesson from that experience?
Femi: Well, I think the way to answer that question is to say that when a project sponsor is a public sector entity or a sub-national government, to the extent that it doesn't try and repeat projects like the one that failed, it learns the lesson, right? But when we see similar projects coming to market and getting broad support across the board? No, we haven't learned the lesson. One of the paradoxes of the financial market especially the banking credit markets which goes through cycles, seven to ten-year cycles, everybody that was involved in the last banking downtown, the last growth of non-performing loans either retired or they lost their jobs and the institutional memory sort of just stays on the shelf and we end up making the same mistakes in different ways. But we forget everything and we learn nothing. That's what the history of the financial markets tells us, that's what the history of the economic cycles tells us. I don't think that's anybody's fault in particular, it's just that, usually, what we end up finding is that there is a triumph of hope and optimism over experience.
Tobi: Another passion of mine is special economic zones which I have actually researched quite extensively and there are a number of them in Nigeria. As a matter of fact, we've been doing it for years under different aegis whether industrial parks or export processing zones. Again, why haven't we seen the kind of impact for this idea as we saw in the case of places like China and Korea? What's going on?
Femi: Nigeria was actually an early adopter of the idea of special economic zones and our export processing zone decree was written in the Babangida administration, so this is something that we did in the early 90s. The development of Calabar export processing zone, Calabar free trade zone which was the first one which is fully government-owned, I think started in 1993. Kano free trade zone which is also government-owned started, I believe, in 1996. So Nigeria was an early adopter of the idea but when you think about government ownership of special economic zones whatever name they are called by, we've got to look at the fact that one of the drivers of the success of these things is the quality of infrastructure, the ease of doing business, and the cost of doing business. So it's supposed to be a magnet for investment by offering world-class infrastructure that makes it easy to do business and lowers the cost of doing business. What that means is that government needs to make significant amounts of investment in the hard and soft infrastructure, both inside and outside the fence. Outside the fence in terms of the connecting infrastructure - road, rail, air, sea or water transportation, power, these days ICT and so forth. You need to make sure that there is also infrastructure within the fence. You need to make sure that in addition to all the hard infrastructure, there is also the soft infrastructure in terms of the regulatory framework in terms of the supply of skilled labour both operational and managerial. So there's a huge amount of investment that needs to be made in hard and soft infrastructure both inside and outside the fence of these SEZs, and that requires government to come up with substantial amount of money. Now when you think about all of the competing demands on the treasury - for education, for healthcare, for public infrastructure, for the justice system, for the police, for the armed forces, the court system - we will struggle to be able to come up with the amount of investments required to make these projects work, at least, to the standards that are required and to the levels that we see when we go around the world. That is something that we cannot run away from and government hasn't been very successful in being able to attract private investment into collaborations with the public sector in that space. The best examples that you will see in Nigeria of special economic zones are private ones - the Onne free trade zone in the Port Harcourt area is a great example, that's an Intels project; the LADOL project in Lagos is another example; Nigerdock is another example, even though Nigerdock, the basic infrastructure there was invested in by government in the late [70s] and early 80s and it went through a process of privatisation. But the real issue is that government would struggle to come up with the amounts of capital investment required and its patient money that's required to stay there over 15-20 year time frames. So I think until we figure out a sustainable way in which to attract private investment in collaboration with government because there is a very important role that government will play as an enabler, as a regulator, as a facilitator of the operation of these special zones. Until we find that solution, I think we'll continue to struggle.
Tobi: Do you think that in making some of these policies, particularly regarding special economic zones, do you think we are pragmatic enough about the economics? And here is why I say this: some of these projects you'll see, at least, in my own reading of some of the initiatives and some of the policy documents, you see things like, oh, wanting to put a zone in all the six geo-political zones and trying to be ethnically correct or politically balanced, where actually in some cases those are not what works. Special Economic Zones primarily should be able to facilitate trade and you have industrial parks located in landlocked places in Nigeria. So are we being pragmatic enough about how we apply these policies?
Femi: As to the question of pragmatism, my answer is no. As to the example of locating zones across what we now call our geo-political zones, I beg to differ slightly.
Femi: If you look around Nigeria, there is no part of the country, there is almost no state you would look in where there's not some compelling argument for some type of investment. I remember looking at the northwest and a place like Sokoto and you will say it's far from the port, it's landlocked blah blah blah, but what most people usually buy as Moroccan leather is mostly the hides of goats that are killed in Nigeria. If you look in the southeast, some of the best quality lead and zinc on earth is buried between Abakaliki and Ishiagu in Ebonyi State. If you look in the southwest, you look in Ogun State, you will see its ability to support major investments in ceramics. If you look in almost every state in Nigeria, I daresay every state in Nigeria, there is some compelling case that can be made and that's not to suggest that you should put a special economic zone in every state, I think that what is required here is to actually take a regional view and use these things as regional levers for development. Use them to leverage regional development by making them magnets for infrastructure investment, magnets for development of manpower and almost like hubs around which regions of the country can grow. So I think that's actually being pragmatic when you take a regional view of development of Nigeria and I think you will be able to establish viability as long as you do the hard work of approaching it correctly and making sure that they're set up properly. However, that's not to say that generally as a country we approach our economic decision-making primarily from a pragmatic point of view. There's a lot of emotion, there is a lot of emotiveness that goes into our policy-making and there's the diversity of views that complicates decision making in Nigeria. There is the fact that we are a democracy which is a good thing, but it just means that every voice will be heard, every voice must be heard and in the policymaking process, in the context of ideas it seems to be that it is the loudest and most strident, most emotive voices that carry the day rather than the voice of reason. So I really think that we need to bring a lot more pragmatism into our policymaking as a country, but on the specific case of citing special economic zones regionally in the country, I think that's actually a very pragmatic thing to do.
Tobi: I agree with you, there's a case for investment in every state in the country, no doubt, given the overall general level of investment. I guess my point is that there should be room for a variety of approaches. You have Ondo state that is building ports, and you have Ekiti State - I've actually had Akin on the show and he says that they are going with business process outsourcing - they are going with services rather than manufacturing. I just think they should be room for a variety of approaches and that leads me to the next question which is, should decision-making on some of these policies be decentralised, either at the region or at the state or whatever unit of analysis we choose?
Femi: Absolutely. There is a very strong case for decentralising as long as we decentralise, we also simplify and streamline the process of making those decisions; so that we don't just decentralise for the sake of it and then we end up getting tangled in even more bureaucracy and more red tape, and more complexity as we decentralise. Certainly, there is a good argument for everyone developing according to their comparative advantage and focusing on where their strengths either lie or potentially could lie if they did the right thing to enable those strengths. So, yes, there must be diversity in approaches because there is no homogeneity in factor endowment anyway.
Femi: Different parts of the countries are blessed differently. And speaking to the case of Ekiti, I think it's actually a very clever thing that the state has done to say it wants to focus on services as a pathway to rapid development and job creation.
Tobi: I want to hit you with a bit of a curveball here. How much influence would you ascribe to history in our political economy, generally?
Femi: Well, history does play a very important role and there is no doubt that history has shaped the political economy of Nigeria. The evolution of political economy is a historical process anyway so history has shaped it. What I quarrel with is, and I'm sort of adjusting my stance to the curveball that you have thrown. What l quarrel with is our using history as an excuse for our failure to perform, our failure to deliver and the abysmal lack of results, the abysmal lack of progress in certain areas and the abysmal deterioration that we have seen in things like the quality of the public service, in things like the quality of the educational system, in things like the quality of public health. Some of the things that should be the building blocks and part of the engine of the development of the country, we have seen significant damage done to those things. That damage we could say, maybe, was inevitable considering our history, but we can debate that for years. Certainly, I think that with all of its imperfections, one of the things that British colonialists bequeath to us was the Colonial Civil Service which became the Nigerian Civil Service and unfortunately that Nigerian Civil Service is now no longer fit for purpose in terms of its ability to deliver on a sustainable basis the, if you like, the infrastructure and the delivery framework for governance, for policy-making, and policy implementation in Nigeria.
Tobi: That's interesting and I'm just going to keep them coming, so another curveball - resource curse: does it really matter? Is it as deterministic as some analysts would have us believe?
Femi: Well, just look at [the] Scandinavia, look at the North Europeans who have oil and what they've done with the oil, it doesn't have to be a curse. The resource curse is potentially a curse when you allow it to be. It's almost like saying that you have a genetic predisposition to diabetes or hypertension, now you can beat that by subjecting yourself to the discipline of a certain lifestyle or at least you can delay its onset or mitigate its results. So the resource curse is not the death sentence that some of the influential thinkers in political economy and economic history have made it out to be. There are countries that have beaten it, that proves that it's beatable.
Tobi: Yeah, so, corruption. How much weight would you ascribe to that? Some people would argue "well, it doesn't matter". Some will say "oh, it is everything that is wrong with us". What's your reaction to that?
Femi: Corruption is huge. Corruption is a huge problem. Corruption reduces the amount of money that is available for the important things that we need to do. Corruption increases the cost of doing business. Corruption compromises our institutions. Corruption is like cancer, but side-by-side with corruption is just the frightening level of [in]competence that you see when you go into the public space. There are some amazing people in public services and there are parts of it that work better than others, and this is not a blanket condemnation but certainly, we do need to strengthen our institutions. We need to strengthen the capabilities of the Civil Service to support the development and implementation of policy, to support government, and to ensure that we achieve the objectives of government. That capacity is almost as important as the cleanliness that we need as well. We need both character and competence.
Tobi: What about ideology in our politics - do we need more or less?
Femi: I'm not a huge fan of ideology. I think we need to be pragmatic. I think many of those ideological arguments are good for the ivory tower, they're good for the think-tanks, they're good for the luxury of being outside the cold phase of making decision in government, we just have to be pragmatic and put the national interest and the interest of the people first. When you want to develop a country as big and diverse and complicated as Nigeria, and you want to develop within a hurry, you have to put pragmatism before ideology.
Tobi: But don't you think that ideology can be useful in terms of competition for dominant ideas? For example, at least, in my own, again, reading of the situation, almost every regime in Nigeria since 1999 regardless of political party or persuasion do protectionism and some form of mixed or closed economy model. So some will argue that if we have ideology enough in our politics there will be competition for some of those ideas and we would actually see better pragmatic policies.
Femi: I'm not sure the issue is one of ideology, I think the issue is about the choices that we've made. So the big choices we've made in the political economy are choices that have really not been in our best long-term interest as a people. So if we're talking about ideology, I think the debate around capitalism and communism have been won and lost. I think the debates are really around doing what works and if you look at the economic history of the 20th century in particular, there are some ideas out there that have been proven to work. For countries that are in a hurry to develop, there are some things that you do. You've got to go for aggressive, inclusive growth. You've got to go for job-rich growth. So you select the policies that help you to do that and the question really is is that what we have done? You have to go for significant investment in hard infrastructure, you have to go for significant investment in education, have we done that? And have we done that in a way that is in our best national interest? So I think those are really the issues we should be talking about rather than ideology. I think it's really about the quality of the choices that we've made rather than the ideologies that we have followed. What is Nigeria's ideology? We don't have one. We don't have a national ideology.
Femi: We had our national development plans of the 70s that talked about government controlling the commanding heights of the economy and then went through a process of privatisation after the structural adjustment reforms of the 80s and the 90s and the reality is that everywhere you go, China is a communist country but China practices state capitalism. The Chinese state as elevated capitalism to an art form. Few years ago I was sitting in a seminar at Harvard University and the director of the China Centre was saying that western countries are taking delegations to China to learn from Chinese government officials how to court foreign investments and how to form strong public-private partnerships with private investors. Countries in the west after the last big economic crisis nationalised banks, gave bailout to car companies, gave bailouts to all sorts of companies. We're going through a Covid pandemic now and the countries that can afford to give bailouts are giving bailout to countries [companies]. So there is a role that government plays, there is a role that markets play and what we need to do is really to find what works for us and do it. As opposed to having this, as far as I'm concerned, fairly sterile arguments about ideology.
Tobi: That's a lot to think about. One final question which is a bit of a tradition on the show, what's the one big idea you would like to see spread all over Nigeria both publicly [and] privately? What's one idea you're passionate about and you'll like to see spread?
Femi: There's a few of them in my mind so I really don't know who wins the competition for first place among those big ideas. Certainly one is that the role of government is to be an enabler of the success of its people, its businesses and its corporations. Government needs to be an enabler rather than a gatekeeper or a gamekeeper or someone that shortens the gains against its people. Government should be opening doors and playing a facilitating and enabling role and helping everyone to actualise their potential and we need to go back to our colonial history and just fix that. It's a big mindset thing but it needs to distilled down into the values and ethos and the way that government works in Nigeria. The Colonial Civil Service was designed to exploit the resources of the country and suppress the citizens for the benefit of the crown. We have replaced the Colonial Civil Service but we really haven't taken that mindset out of government and that's a big thing that we need to do as a country.
Another thing that I would like to see us just understand is that technology has given us two pathways to rapid development. It used to be from the economic history of Japan, the Asian Tigers, China, the more recent countries that are industrialising, that industrialisation was a pathway to growth starting from the industrial revolution - what happened in western Europe, what happened in America, what has happened across the world - industrialisation is the pathway to growth, and it creates jobs in their millions and raised people out of poverty and you can do that very quickly. China has done the economic miracle of taking most of its people out of poverty in one generation and that was largely through just doing manufacturing investment. But now we can pursue new economy investment in services in addition to old economy investment in manufacturing. So we have two pathways to growth and we need to exploit them quickly because we have a few hundred million young people that we need to put to work. We have an existential crisis that is brewing. It's already upon us as a country and we are not really treating it as the national emergency that it is. So all of the unrest that we see, all the difficulty that we see, all the killings, all of the social vices that we see are really not happening by accident. We need to create opportunity by the hundreds of millions. We have a crisis but we are continuing with business as usual.
Tobi: I do hope people listen. Thank you very much, Femi Edun, it's been fantastic talking to you.
Femi: Thanks very much, Tobi, it's been a pleasure talking to you.