nigeria local content act-opportunities for sme financing

8/12/2019 Nigeria Local Content Act-opportunities for Sme Financing

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NIGERIAN OIL AND GAS INDUSTRY CONTENT

DEVELOPMENT ACT, 2010

(Opportunities for Small And Medium Scale Enterprises (SMEs) to Access Funds fromthe Act)

A presentation

for the

Lagos Chamber of Commerce and Industry

27th

September 2011
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Outline

Introductionthe Act

Challenges facing the Small and Medium Enterprises (SMEs)

Financing Options

Packaging SMEs For Assessing Finance

Transforming to a public company

Conclusions


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Introduction..the Act


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Last year, the President of the Federal Republic of Nigeria signed theNigerian Oil and Gas Industry Content Development Bill into law

The Nigerian Oil and Gas Industry Content Development Act (the Act) is

designed to enhance the level of participation of Nigerians and Nigeriancompanies in the country's oil and gas industry

With the promulgation of the Act, the Government has clearly established itsintention to increase indigenous participation in the industry in terms of

human, material and economic resources

The implementation of the Act is expected to significantly change the currentbusiness and operating structure in the Nigerian oil and gas industry,

particularly for the international oil service companies.


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Key Provisions of the Act

Section 1which states "notwithstanding anything to the contrary contained in thePetroleum Act or in any other enactment or law, the provisions of this Act shall apply toall matters pertaining to Nigerian Content in respect of all operations or transactionscarried out in the oil & gas industry

The Act definition of Nigerian Content as the quantum of composite value added to

or created in the Nigerian economy by a systematic development of capacity andcapabilities through deliberate utilization of Nigerian human, material resources andservices in the Nigerian oil and gas industry

A Nigerian Company is defined as a company formed and registered

in Nigeria accordance with the provisions of companies and Allied

Matters Act with not less than 51% equity shares by Nigerians

Establishment of the Nigerian Content Development and Monitoring Board (the Board)to monitor, coordinate and implement the provisions of the Act; and the NigerianContent Consultative Forum to provide the platform for information sharing.


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National Content Development Fund (NCDF) Section 104creates the NC Development Fund for funding the

implementation of NC development.

The law creating NCDF stipulates that, one percent of all awarded

contracts in the industry are to be transferred into the NigerianContent Development Fund (NCDF)

The fund will be deployed specifically for the development of Nigerianservice providers capacity in the oil and gas sector

This fund is different from the $350 million Local Content Fund puttogether by the Nigerian National Petroleum Corporation (NNPC) in2007 to provide working capital for Nigerian firms that won servicecontracts in the oil and gas industry


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Can the Act help SMES to overcome Financing Barriers ?

If many entrepreneurs are to dipinto their personal savings when

financing a business, there are

impl icat ions w hen personal

savings are scarce?

Greater actual risk?

Fewer business opportunities?

Less investment for future growth?

Slower overall business growth?

Small and medium enterprises

firms have more financing barriers

than large firms.1

Higher interest

rates

Less access to long-term loans, foreign

banks, non-equity, and export finance

More bank

paperwork


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Accessing the National Content Development Fund by SMES

Section 104of the Act creates the NCDF for funding the implementation of NationalContent development, and into which the sum of 1% of every contract awarded to anyoperator, contractor or any entity involved in a project or activity shall be paid

It also stipulated that the fund shall be managed by the Nigerian Content Board

although the Board has hinted that the fund will be managed by a proper fundmanager, with international best practices. so, there is no question of utilizing the fundfor what it is not meant

Part of conditions to qualify for consideration for the fund include, capacity to

demonstrate the bankability of the prospective investment, provision of a

business plan and proof that the investment would be able to repay the loan.

It seems that accessing the fund would require stringent documentation andprocedures that accessing other form of institutional financing would require.

Therefore the act is not necessarily targeted at assisting SMES alone


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Challenges facing the Small and MediumEnterprises (SMEs)

..are not limited to financing alone


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Environmental Challenges

Corruption = Taxes

Affecting the cost of doing business

Inability to compete globally

Unregulated importation of goods that can be produced locally

Killing local industries

No industrial Linkages

Inadequate Infrastructure

Power (energy), Roads etc

Regulatory Overkill- No SME rate

FIRS, Nafdac, Lassa, SON, CAC, Planning Approvals etc


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Specific Challenges

Low level of entrepreneurial skills with poor management practices

Constrained access to money and capital markets

Low return on investment with inadequate equity capital

High rate of enterprise mortality

Multiplicity of regulatory agencies and overbearing operating environment

Lack of access to information and restricted market access

Integrity and transparency problems


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Financing Options

..talk to your Financial adviser


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Accessing FundsOptions

Private Sector Versus Public Sector


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For private sector sources choice of financing depends on thecompanys stage in its life cycle which generally follows the patternbelow

PrivatePlacement

Corporate BondHybrid

Growing

Matured


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Debt Financing Options

Money Market

Term loan

Commercial Papers

Overdrafts

Leasing

Capital market

- Corporate Bonds
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European Union (EU) EU-15: > than 75% of SMEs in the EU-15 have sufficient financing

NMS:


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European Union (EU) Working capital is financed mostly with internal funds

As are new investments!

% OF WORKING CAPITAL AND NEW INVESTMENT FINANCE BY.

Working Capital (%) New investments(%)

Internal Funds 75 70

Equity 11 11.5

Banks 13 5

Informal Barrowings 5 5

Trade Credit 5 3

Credit Card 2 0

Leasing 1.5 2.5

Government 0 3

Others 2.5 2


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14.3

24.1

32.7

40.5

59.8

13.7

23.7

32.1

39.2

31.628.0

47.8

64.8

79.7

91.4

0

10

20

30

40

50

60

70

80

90

100

2006 2007 2008 2009 2010

%Bank Lending as a Percentage of GDPNigeria

Private Sector

Public Sector Sector

Total

Source : CBN 2010 report


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Private equity is an asset class consisting of equity securities in operatingcompanies that are not publicly traded on a stock exchange.

There is a wide array of types and styles of private equity and the termprivate equity has different connotations in different countries.

Private equity investments can be divided into the following categories:

Venture capital - a broad subcategory of private equity that refers to equityinvestments made, in less mature companies, for the launch, early development,or expansion of a business

Venture capital is often sub-divided by the stage of development of the companyranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business

Growth capital - refers to equity investments, most often minority investments, inmore mature companies that are looking for capital to expand or restructureoperations, enter new markets or finance a major acquisition without a change ofcontrol of the business.

Leveraged buyout - refers to a strategy of making equity investments as part of atransaction in which a company, business unit or business assets is acquiredfrom the current shareholders typically with the use of financial leverage.


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Equity Financing Options In addition to the general requirements discussed earlier, equity

financing would require the inclusion of the following parties

Rating agencies

Issuing house

Financial adviser

Underwriter

Stock broker

Registrar Capital market regulator (SEC)

Country and other risks analysis if foreign private equity firm isinvolved


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Leasing Among the money market instruments, leasing is gradually becoming popular as

shown in table 1 below

Leasing can be defined as obtaining the use of machinery, vehicles or otherequipment on a rental basis

This avoids the need to invest capital in equipment

Ownership rests in the hands of the financial institution or leasing company, while thebusiness has the actual use of it.

Table 1: Equipment leasing volumes by sector (2006- 2010)1

2006 2007 2008 2009 2010

Manufacturing 39,996,226 56,904,120 69,778,800 87,244,500 91,595,175

Transport 37,196,613 52,063,830 80,245,620 100,307,025 137,420,624.25Agriculture 2,296,554 6,019,650 34,889,400 43,611,750 44,483,985

Oil and Gas 82,491,328 87,125,220 87,223,500 109,156,525 152,819,135

Government 1,607,560 3,071,250 27,911,520 43,889,400 46,083,870

Telecom 24,797,735 38,181,780 41,867,280 52,334,100 56,520,828

Others 1,495,114 2,334,150 6,977,880 8,722,350 8,984,020.50

Total 189,881,130 245,700,000 348,894,000 445,265,650 537,907,637.75

Note: 1N thousands.


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Advantages of leasing Added Credit Availability

Bank credit lines are not affected, so you retain your bank borrowing capacity for otherneeds.

Conserves Working Capital Financing

Equipment leasing finances 100% of the equipment cost, leaving precious workingcapital for other needs.

Improves Cash Flow

Equipment leasing allows you to pay for the equipment as income is earned from itsuse.

Tax Deductible In many cases, equipment lease payments can be treated as a fully tax deductible

expense.

Quick, Easy and Less Expensive

The whole equipment leasing process is faster, simpler, and often less costly than otherequipment financing alternatives.


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The aim was to provide either long-term credit or specialized services tothe SMEs.

Unfortunately, these projects have often fostered a culture of non-repayment or failed to reach the target group or achieve financial selfsustainability.

The financial policies pursued were of interventionism with governmentsinfluencing the credit flows through a system of subsidies, interest ceilings,policy-based credit allocations etc.

However, we have seen some new initiatives in recent times by the present

government to address SME funding

N500 billion CBN Intervention Fundnew

Unlocking Pension Fund for financing infrastructurenew

But how easy is it for access for SMEs ? Big question


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Project Selection Criteria (BOI)

The bank's emphasis is on prudent project selection and management, accordingly, itsupports quality projects with potential developmental impact

BOI therefore, considers industries that meet the following criteria:

Capacity to substantially add to industrial output.

Projects that use largely domestic raw materials. Industry in which Nigerias comparative advantages could be converted to competitive ones.

Niche projects that produce for worldwide consumption.

Projects that create both forward and backwards linkages, with the rest of the domestic orregional economy.

Ventures that promote inter-state or regional integration.

Small and medium enterprises (SMEs) that have linkage with large firms, belong to clusters and

operate under franchise.

Enterprises with high employment generation capacity.

The project must be technically feasible, commercially viable and economically desirable.

Projects that are environmentally friendly.

Enterprises that have good management set-up and proper accounting procedures.

Enterprises promoted by women entrepreneurs.


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Approach to development (BOI)

Source : BOI Website


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CBN Loan Guarantee SchemesThe N200 billion Small and Medium Enterprises Credit Guarantee Scheme (SMECGS)

In March 2010, the Central Bank of Nigeria (CBN) established the N200 billion Small andMedium Enterprises Credit Guarantee Scheme (SMECGS), for promoting access to creditby SMEs in Nigeria.

The activities to be covered under the Scheme are:

Manufacturing

Agricultural Value Chain

Educational Institutions

Any other activity as may be specified by the Managing Agent from time to time.

For the purpose of this Scheme, a Small and Medium Scale Enterprise (SME) is anenterprise that has asset base (excluding land) of between N5millionN500 million andlabour force of between 11 and 300

Maximum Loan amount is N100 million which can be in the form of Working Capital, TermLoans for refurbishment/equipment upgrade/expansion, overdrafts, etc.

The guarantee cover shall be 80% of principal and interest and shall be valid up to the

maturity date of the loan with a maximum tenure of 7 years inclusive of a 2-year moratorium.


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Packaging SMEs For AssessingFinance

.. what Financiers Would Like toSee


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Information financiers require for decision making

ToolsFinanciersrequire fordecisionmaking

BusinessPlan

Cashflowprojections (usually3 years)

Ownership profile

/Management

Accounts


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Accessing the Financial Markets (Debt and Equity Markets) having these prerequisite

will help

Registration/Incorporation with CAC

Good corporate governance structures

Reliable financial records (embrace IFRS reporting)

Maintain a visible brand

Industrial (quality standards) certifications (ISO, NIS, etc)

Engage quality professional advisers

Good credit rating

Investing in CSR


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Areas financiers focus on Entrepreneur / Management

Business description

Product/ service description

Location advantage Customer description

Competitive Advantage

Financing Requirement

Costing & Pricing

Sales and Justification forsales

Marketing Plan

Business Strategic plan


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Business Viability

Ambitious sales forecast

Declining sector

Lack of understanding of customers demographics

Capacity issues.

Oblivious of the competition

Distrustful data analysis

High gearing

High OPEX

Unrecorded expenses ( Directors expenses)


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Appropriateness of the funding to the business needs

Common Rules

The more unsteady your cash flowmore your equity

requirement The higher the knowledge intensity (early stage IT,

Consulting, entertainment) less debt is optimal

Faster growing SMEs can draw on more sources of

finance to fund their operatione.g. Spontaneous finance,equity sale at a premium, debt.

What option is cheaper in the long/short run?

What option is better for cash flow?


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However publicly quoted companies

have greater access to finance thanSMEs

But first; SMEs would have to transform


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Transforming From a Private Company

into a Public Company

..will require a paradigm shift


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Why Transform?

There are advantages should a private company decides to remainprivate:

Private companies enjoy a quick decision-making ability The owners of private companies are usually accountable to

themselves in how decisions work out. Usually owners are managers Restriction on transfer of shares

The process of going public requires a lot of filing of paperworkbecause of the regulations


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Advantages highlighted below are enough incentive to go public

Continuity

Going public will facilitate succession since management is separated

from ownership

Financing

Access to various forms of financing from money and capital

markets.

Lower cost of financing

Protection

From government and hostile competitors

It would be more difficult to attack a public entity than a private company

Enhances Discipline and corporate Governance

Accountable to various stake holders


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Thank you

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