Transformation agenda and the leasing option
Wednesday, 01 February 2012 00:00 BUKKY OLAJIDE

Leasing is still the most creative financing instrument, which if utilised can create wealth and enhance economic growth as BUKKY OLAJIDE finds out.

AS the country is expected to experience infrastrutural turn-around with the N35 trillion investments by the Federal Government, as indicated in the 2012 budget, the leasing sector is key in this investment proposal.

The Government has set out priority areas in 2012 as contained in this year?s budget, the first under the transformation agenda. According to government the budget has been designed with the theme ?fiscal consolidation, inclusive growth and job creation? focusing on four main pillars. Macro-economic stability; Structural reforms; Governance and institutions and Investing in priority sectors.

As part of the macroeconomic stability, government stated that it would ?pursue policies that would create a stable macroeconomic environment through a strong and prudent fiscal policy, manageable deficits, sustainable debt ?GDP ratio of not more that 30 per cent and single digit inflation, thereby promoting real growth?.

Globally, leasing has a long and successful history. Leasing gained its popularity with its flexibility features. In this regard, it has competed with the traditional financing products such as bank loans, bonds and the likes.

Modern leasing in Nigeria started in the 1960s. Its relevant could be manifested in the fact that about five million jobs can be said to have been created since.

Leasing is an asset based financing transaction with the asset used as security.

In actual fact, leasing is based on the proposition that income is earned through the use of assets, rather than from their ownership.

It focuses on the lessee?s ability to generate cash flow from business operations to service the lease payment, rather than on the balance sheet or, on past credit history.

Over the last decade, leasing has emerged as the fastest growing source of finance.

Small and Medium Scale Enterprises are not left out from the benefits of leasing as about 15,000 firms have keyed in and benefited.

The Equipment Leasing Association of Nigeria (ELAN) has always been optimistic about developing the sector and has stressed that the new dispensation presents immense opportunities for leasing in terms of the huge demand for capital equipment that would arise.

At their last conference, which took place in Abuja, the participants weaved the conference around infrastructure development with the special focus on the power sector.

The key challenge to the leasing industry is the capacity to meet this demand says Kehinde Lawanson, the president of ELAN. ?It is important for the leasing industry to develop a strategic response to this opportunity,? he said.

The participants agreed that adequate electricity is the requisite stimulus for the development of the industrial sector, which in turn will boost the leasing industry.

They stressed a need to establish a regulatory framework for the leasing industry to create stakeholder confidence.

ELAN national lease conference is a yearly event and the highest platform for stakeholders in the leasing industry.

Leasing provides an avenue for networking and interaction, says Lawanson.

The oil and gas sector maintained its lead with about 40 per cent growth, followed by an impressive performance from transportation at 37 per cent growth, where commercial vehicles for passengers and haulage remained the major attraction to lessons.

?The total figure for the industry could well be over N500 billion taking into cognisance the level of leasing activities carried out by non-ELAN members, especially in the oil and gas sector, which are not captured,? the chairman said.

The association feel that ordinary Nigerians are benefiting from leasing as more funds are going to the ?peoples? sectors, that is, manufacturing, telecoms, agriculture and transportation.

Despite the numerous successes recorded so far, said Lawanson, the industry needs the support of government now more than ever before.

While saying that the operating environment has become tougher in recent times, Lawanson emphasizes the adverse effects of value added tax which amount to double taxation.

According to him, withholding tax is another issue as it depletes the real vale of a lease, capital allowances, as well as inadequate funding and absence of appropriate legal framework on the practice of leasing.

The ELAN boss explained that leasing, like any other economic endeavour depends substantially on consistent and favourable government policies.

?It is therefore important for government to abolish policies that are inimical to the development of leasing in Nigeria and formulate polices that will stimulate more participation and penetration into it, the industry and penetration into the industry and most importantly real and effective patronage by government at all levels.

For instance, he said the exemption of leasing from the value added tax (VAT) and withholding tax, the reversal of the right to claim capital allowance in finance leases in favour of lessor as well as the enactment of appropriate laws that will enhance business operations in the industry, boost creative and highly productive business financing in the nation?s economy. We are particularly pleased that a leasing bill is currently before the National Assembly and shall appreciate assistance from all quarters to see that the long awaited law is enacted without further delay.

His words: ?It is gratifying to note that our efforts at resuscitating the bill to regulate equipment leasing in Nigeria is on course. The history of the bill is a very pathetic one as it was passed by the 5th National Assembly but was not assented to b the president before the expiration of the Obasanjo?s administration due to administrative bottlenecks, hence the decision of the 6th National Assembly to retool the bill. The bill went through full legislative cycle at the immediate past House of Representatives and was transmitted to the Senate where it went through first reading before the expiration of the tenure of the 6th National Assembly.

?Notwithstanding these obstacles, we remain steadfast in the pursuit of the enabling law and urge the National Assembly to accelerate the process so that the industry will be placed in a better position to contribute meaningfully to the economic development of the country.

?The bill when finally enacted will to a large extent lead to the expansion of leasing activities. It will bring about a healthier environment by addressing major constraints assailing the industry, which include high incidence of default, cumbersome repossession process, quackery and the dubious activities by some nefarious individuals and corporate bodies. In same vein, the new Leasing Act will do away with the current confusion and uncertainty about the nature of leasing and lead to the following benefits:

For ordinary Nigerians: easier way of acquiring assets to enhance quality of life. More businesses and job opportunities.

For small businesses: easier ways of acquiring productive assets for growth and job creation.

For all levels of government: well-regulated financial sector, increased investment, increased tax revenue, job creation and poverty reduction.

For the industry: certainty, security, consistency and growth.

For Nigeria?s economy: more investment, production and economic growth.

?On our part, the Association shall continue to promote the business of leasing through our numerous awareness programmes, training, research and publications as well as the pursuit of an enabling environment. The challenges are enormous and we appreciate the fact that there are a lot more that need to be done to make the Association more effective and responsive to the requirements of the industry.

Speaking on Leasing and Power Sector Development in Nigeria; issues and challenges; Policy Framework and Investment Potential, the Chairman and Chief Executive Officer of the Nigerian Electricity Regulatory Commission, Dr. Sam Amadi noted that the current administration?s determination to privatise the power sector will attract the necessary investment in the industry and consequently stimulate market growth.

To further stimulate investment, he said the government need to conclude on the issue of sovereign guarantee and need to explore avenues of collaboration between power and leasing industries.

Amadi mentioned some incentives for investment in the power sector as; five year tax holidays or seven year tax holidays for manufacturers of transformers, meters, control panels, switch gears, cables and related electrical equipment.

The chief executive officer also mentioned exemption from duty taxes on imported equipment.

Incentives also included exemption from duty taxes on imported equipments, while capital and investment allowance can be carried forward and used after tax holiday period.

Giving basis for the reform agenda, Amadi said that the reversal of trends in generation transmission, distribution and end use supply services is consequent of demand gap and huge supply, saying infrastructure and work force as well as lack of appropriate investment in network capacity development and expansion.

The reform agenda also aims at attracting foreign and private equity into the network capacity development, reduce the government public sector borrowing requirement and encourage production and allocative efficiency through appropriate, yet, cost reflective rates.

Also speaking at the event, the Commissioner, Technical, National Pension Commission, Eyamba Henshaw stated that the principle of investment as assets are accumulated from mandatory contributions is safety and fair returns.

Henshaw explained that the authorised markets for trading pension funds are security exchange registered by SEC or a trading facility recognised by the Central Bank of Nigeria (CBN).

According him, pension funds are long term funds requiring long term outlets for investment such as provision of infrastructure. Infrastructure outlets include power, transportation and telecommunication infrastructure and so on.

Currently, he said, 64 per cent of the 4.95 million registered contributors were below 40 years of age as at September 2011.

Talking about suitability of pension fund investment in infrastructure, Henshaw said it has long duration with asset and liability and it is generally inflation protected with stable cash flow while returns have low correlations with other traditional asset classes.

While saying that investment must be in a structural manner, Henshaw explained that infrastructure fund shall have well defined and publicised investment objectives and strategy as well as disclosures of pricing of underlying assets.

Other conditions are such as satisfactory pre-defined liquidity and exit routes and to be managed by experienced fund managers, versed in infrastructure financing and registered with SEC as fund managers.

Speaking at the event, a director of fleet management with Egstra Holdings Limited, Gisela Schmidt stated some of the fleet risks experienced n Africa as availability of funding, credit risks, geographical infrastructure, inadequate infrastructure and poor logistics.

Other fleet risks include; laws and practices (culminating in unsynchronised regional tax and regulatory regimes), inadequate legal infrastructure, unskilled labour force and political instability.

According to Schmidt, Egstra Holdings Limited is strategically positioned to assist African countries with much needed infrastructure development through the provision of world class products, services and innovative financing options.

Egstra Holdings is an integrated capital equipment and leasing provider, with value-added services in construction and winning, passenger and commercial vehicles and industrial equipment in Southern Africa, Africa, the United Kingdom and Ireland.

Others are still socio-economic conditions, crime and corruption, cost of doing business, systems and technology as well as grey imports.

He stated some leasing solutions as service offering adapted to local market requirements and legislation with a policy to stimulate and support the local economies by supporting local supply chemical.

These can be done through full maintenance leases, operating leases, fleet management solutions, supply chain management, insurance and live vehicle tracking.

Richard Ayibiowu of Pivot Engineering Company Limited on his part said no light at the end of the tunnel without focused attention on investment in power sector.

Nigeria will be on the moon when we resolve power funding problems, said Ayibiowu.

He mentioned some key constraints across the Nigerian power value chain as, overdependence on gas for fuel with domestic gas supply deficit coupled with regulated gas prices, which is a disincentive for producers.

Ayibiowu also mentioned technical weaknesses in grid worsen outages and revenue generation while PHCN and Transco are no financially credible off-takers.

There is also the issue of high technical and commercial losses as well as low collection rates which is a major factor said to be preventing financial viability of discos and hence the entire system while calling for a significant rehabilitation, maintenance and technology investments.

Talking about imperative for success, Ayibiowu mentioned clear strategy on regulatory bottlenecks to make power sector attractive to investors and financiers, while identifying syndicate project finance opportunities to fund across the power sector value chain.

He mentioned exploring the flotation of development bonds as a means of low cost and long term funding while facilitating the intervention of international financing agencies to augment local funding options

He advocated for the development of capacity building programme for industry stakeholders to position for implementation of the power roadmap.

According to him, relative stability in the FX market is likely to be sustained in the near-term and the CBN will continue to monitor developments in the market to check volatility and speculation

He suggested working with PENCOM to unlock pension assets for investment in infrastructure saying that Pension Commission (PENCOM) Regulation 5.2.3 allows Pension Fund Administrators (PFAs) to invest in infrastructure projects through eligible bonds or debt securities.

?CBN is to provide guarantee to (PFAs) for investment in infrastructure projects until projects acquire a rating,? he said.

He also suggested working with Bankers? Committee to build Industry through a capacity building programme aimed to train 250 banking professionals in Project Finance (Power) in 2011.

?Option that is being pursued at the moment is the route with World Bank is the Partial Risk Guarantees as they are deemed to be the most efficient use of the Federal Government?s balance sheet, ?? he said.

He added that the Nigerian Electricity Liability Management Company (NELMCO) should fully assume non-operating assets and liabilities of the Power Holding Company of Nigeria (PHCN).

On his part, the Managing Director of LECON Limited, David Nwachukwu mentioned constraints to growth.

?Combination of factors: Infrastructure inadequacies that raise production costs, weaknesses in the external environment (Euro-zone crises, US Debt catastrophe, etc.), policy reversals and political instability have affected our growth trajectory,? he said.

According to him, growth is still below projected rates and Nigeria?s development will remain below its potential if access to finance for MSME?s is not improved in order to engender their active participation in the value chain.

He also mentioned low savings, weak financial sector, low per capita income, aid dependency, low financial depth as well as weak regional integration that limits flow of trade within ECOWAS market.

Poor internal controls, weak government structures and often unsound financial management practices were also held responsible for the country?s lack of growth.

Unleashing Nigeria?s growth potential, Nwachukwu said for Nigeria to realise its growth potentials, it should quickly take its place as the regional trade hub and re-establish itself as an investment destination.

?We must aggressively address infrastructure gaps, create a dynamic environment for both local and foreign investment into strategic sectors, provide finance for investments that promote development, especially in areas where otherwise, the market fails to invest sufficiently,? he said.

Leasing has always been a strategic solution for business.

Approximately 80 per cent of all U.S. entities currently lease equipment, and leasing now accounts for one-third of externally-financed equipment.

In 2007, the volume of European market stood at 340 billion euros.

With the present economic uncertainty, the public sector should consider adopting the lease option to help them successfully achieve its objectives.

Leasing is based on the proposition that income is earned through the use of assets, rather than from their ownership.

It focuses on the lessee?s ability to generate cash flow from business operations to service the lease payment, rather than on the balance sheet or on past credit history.

Nigeria has witnessed massive transformation in ICT, financial services, maritime, aviation, as well as science and technology sectors.

His words: ??Government?s poor planning and under-investment in sectors that are key to growth and improving the quality of life of citizens, have left a huge infrastructure supply deficit.

??Estimated yearly spend of about $10 billion, about 40 billion barrels in projected oil reserves, 4 million b/d in output and 200trillion std cubic feet of gas, Nigeria?s oil and gas sector and its associated strategic industries ? power, steel, petrochemicals, fertiliser and cement, as well as Agriculture, all present great opportunities for leasing.

Talking about macroeconomic policy environment, Nwachukwu called for increased trade and investment linkages with India, China, Brazil and other emerging market countries (BRINCS).

Giving rationale for leasing in the public sector, the managing director noted that current budget trends, that is, at 74 per cent, recurrent crowds out spending for capital expenditure. Target is to reduce this progressively to 68 per cent by 2015.

He stressed a need to improve and maintain fiscal prudence, as well as aggressively increase revenues through tax collection reforms.

With rising oil production, especially in the Gulf region, in the face of a resurgence of crises in major OECD countries and the consequent austerity measures, OPEC predicts that oil demand will slow down slightly in 2012. The implications for oil prices and Nigeria?s revenues are also predictable;

Other drivers of leasing in the public sector mentioned are, fundamental changes in the state of insecurity that not only calls for security agencies that are well resourced, but has equally boosted the growth of demand for security equipments in public buildings, airports and so on.

He also emphasised the encouragement of the growth of SMEs, through value-chain development, especially in the non-oil exports sub-sector, to reduce the high dependence on oil and gas, which had made Nigeria very vulnerable to the vagaries of changing world energy markets,

Talking about Private Public Partnership (PPP), he said, leasing is particularly important for private public partnership infrastructure development.

According to him, lease creates an additional budget for public authority user for investments, provides efficiency by way of cost reduction and increased asset quality and facilitates control by preventing budget over run because the lease instrument is offered at a fixed price for the lease term.

??Obsolescence is avoided and replacement is planned for and guaranteed,? he said.

Nwachukwu also noticed the unfavourable operating environment. With lack of effective and efficient legislative framework, he said, there is no specialised leasing law.

His words: ?The general absence of registries for leased assets for lessors to publicise their interest in the leased asset and protect their ownership rights.

??Leasing requires qualified and experienced personnel with expertise in accounting, finance, legal and decision making.

??Inefficient repossession procedures. Repossession through regular court litigation is costly, time-consuming and cumbersome, forcing lessors to resort to self help repossession procedures. Special repossession procedures is required.

He also stressed lack of effective insolvency regimes. Saying that clarifying the rights of lessors and lessees under bankruptcy to make the events and consequences of default clearer, lack of clear and neutral tax rules have generally created a bias against the leasing industry

His words: ?Income tax treatment of leasing and loans should be similar, as there is little difference between leasing and loan finance while sales tax and valued added tax rules should clarify that a leasing operation is a financial service, not the sale of a good.

Talking about challenges, Nwachukwu said, perhaps the greatest challenge faced by the leasing sector, is the negative effects of the current global economic and financial crisis on capital flows, foreign direct investment, trade in primary commodities, resulting in a deceleration of economic growth.

Apart from the global meltdown, he said businesses operating in Nigeria are faced with huge operating costs that tend to undermine their ability to make profits.

His words: ??We expect extremely difficult operating conditions with slower growth and a crucial question will be the collection of lease rentals as delinquencies are expected to rise,? he said.

He observed that the increase in the number of lessors has also brought more intense competition into the market, with bank lessors having a clear advantage in terms of funding costs. With their enlarged capital base, many Banks have ventured into the provision of assets-backed financial solutions.

Talking about fraudulent practices of unscrupulous lessees, Nwachukwu mentioned vandalisation, multiple lease financing on the same asset in sale and lease back transactions, submission of false documents in application for lease facility and wilful default in rental payments.

His words: ??Short-term nature of available funds. Leasors are forced to make lease tenors shorter than they ideally should be while employing a whole range of hedging arrangements in meeting funding requirements and minimizing maturity gaps, and the resultant interest rate exposure.

??Such hedging arrangements include: advance rental payments, high margin pricing and down payments.

Difficulties in repossession of leased assets when the lessee violates the provisions of a lease agreement. Many lessees capitalise on judicial processes to obtain fraudulent injunctions to frustrate the efforts of lessors,? he said.

Talking about factors affecting the prospects of the sector.

Capacity building: technical skills and product knowledge for lessors, and improved understanding of leasing among tax officials, regulators, legislators, the judiciary, and public awareness on the benefits of leasing.

He also mentioned strategic alliances and international market access; and absence of appropriate legislative and regulatory framework to support activities in the leasing industry.

Nwachukwu recommended that the draft leasing law, which has been awaiting enactment in the National Assembly, is key to the development of the sector and is considered a priority area of intervention.

His words: ?Regulatory support for electronic accounts and other innovations that simplify requirements for the provision of leases for example credit information bureau services, facilitate payments and reduce transaction costs should be promoted by the central bank.

??In addition to improving their ability to generate timely, reliable and accurate information on their performance, training and capacity building initiatives to improve their management and governance structures, will potentially lead to improved portfolio quality, financial performance and reduction of transaction costs for service providers. ELAN should explore donor-funded initiatives in this area.

??CBN should revisit the issue of access to pension and DMO funds through debt instruments (e.g. bond issuance) as a source of long-term funds for regulated institutions that are interested in raising debt capital. With capital raised, banks will be mandated to channel a given percentage to support NBFI?s providing leasing to underserved/target sectors.

??Recent reforms to allow for operation of regional banks will shift focus to small enterprises with potentials for business expansion and improving value chains.

??Over the next few years, it seems inevitable that more leasors will move ahead with automating their entire lease management process from origination to final disposition. Embracing technology that solves specific problems will create a measure of competitive advantage.

??Group lending methodologies will reduce administrative costs for the leasors and transaction costs for the leasees as well as improve sustainability.

??In order to facilitate funding methodologies that are largely based on non-collateral, minimum documentation and none or basic financial analysis, initiatives that encourage the building of credit history and sanction deviant and unacceptable behaviour must be encouraged.

?With the initial success of the amnesty programme and government?s pronounced commitment to the rehabilitation of the militants, it is reasonable to expect a steady rise in crude oil reserves and production level.?

Implementation of the comprehensive development plan for the Niger Delta region will impact positively on the elevated political risk associated with the perception of Nigeria as a risky investment destination

Profitability will generally decline owing to stiff competition, thin margins as well as additional delinquencies arising from a continued business downturn.

The years ahead will be extremely challenging, forcing operators to seek ways to: cut overheads, improve operational efficiencies, explore new markets, and develop new and meaningful products.

Operational efficiencies will come from streamlining process and investments in IT systems; niche markets will be sought with greater intensity; and operating leases will be introduced in many lease economies to meet lessee needs not met by loan-like finance leases.

??While Nigeria?s economy is chiefly oil-dependant, it has plans for substantial investments in infrastructure development ? transport and communication sectors, real estate and construction. All of these are bound to generate additional capital requirements, with clearly positive implications for the leasing industry. The equipment leasing business will therefore, show enormous potential and promise in the years ahead.

Niche players and bank lessors may have better chances for success, especially in those market segments where new opportunities are created.

A lack of clear understanding at the policy-making level about the advantages of leasing and its cost-effective nature has stifled the growth of this instrument as well as the growth of its vehicles, that is the asset financing. However, we contend that the time is now, for our policy makers to wake up to the true potential of leasing and its catalytic role in Nigeria?s economic progress.

??To attract serious players, it is imperative that we realise the urgency of approving the enabling legislation, which spells out clear rules of the game, create the right regulatory framework and understand the need to change the way we do business.?

While recessionary period lingers in some other countries Nigeria?s economy, with a 167m domestic consumer base, a regional market of 300m, and an ambitious 20: 2020 vision is expected to achieve sustained growth, if sustained efforts are made to address infrastructure gaps.

??Since the public sector does not have all the resources to meet the growing demands, this will translate into great potentials for leasing to prosper,?? he said.

Source: http://www.nigerianbestforum.com/generaltopics/?p=116202

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