NIGERIAN OIL AND GAS INDUSTRY CONTENT DEVELOPMENT ACT, 2010

(Opportunities for Small And Medium Scale Enterprises (SMEs) to Access Funds from
the Act)
A presentation for the

Lagos Chamber of Commerce and Industry

27th September 2011

Outline
Introduction the Act Challenges facing the Small and Medium Enterprises (SMEs) Financing Options Packaging SMEs For Assessing Finance

Transforming to a public company

Conclusions

Introduction
..the Act

Last year, the President of the Federal Republic of Nigeria signed the Nigerian 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 Nigerian companies in the country's oil and gas industry With the promulgation of the Act, the Government has clearly established its intention 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 current business and operating structure in the Nigerian oil and gas industry, particularly for the international oil service companies.

Key Provisions of the Act

Section 1 which states "notwithstanding anything to the contrary contained in the Petroleum Act or in any other enactment or law, the provisions of this Act shall apply to all matters pertaining to Nigerian Content in respect of all operations or transactions carried 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 and capabilities through deliberate utilization of Nigerian human, material resources and services 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 Nigerian Content Consultative Forum to provide the platform for information sharing.

Key Provisions of the Act Submission of Nigerian Content Plan (the Plan) to form an essential component of bidding for any license, permit or interest in the oil and gas industry. It shall contain provisions to ensure that 'first consideration is given to Nigerian independent operators, goods and services and also to Nigerians in employment and training Section 2 which states that "all regulatory authorities, operators, contractors, alliance partners and other entities involved in any project, operation, activity or transaction in the Nigerian oil & gas industry shall consider Nigerian content as an overall project development and management philosophy for project execution"

National Content Development Fund (NCDF) Section 104 creates 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 Nigerian Content Development Fund (NCDF) The fund will be deployed specifically for the development of Nigerian service providers capacity in the oil and gas sector This fund is different from the $350 million Local Content Fund put together by the Nigerian National Petroleum Corporation (NNPC) in 2007 to provide working capital for Nigerian firms that won service contracts in the oil and gas industry

Can the Act help SMES to overcome Financing Barriers ?

Small and medium enterprises firms have more financing barriers than large firms.1
Less access to long-term loans, foreign banks, non-equity, and export finance

Higher interest rates

More bank paperwork

Greater actual risk? If many entrepreneurs are to dip into their personal savings when financing a business, there are implications when personal savings are scarce? Fewer business opportunities? Less investment for future growth? Slower overall business growth?

Accessing the National Content Development Fund by SMES

Section 104 of the Act creates the NCDF for funding the implementation of National Content development, and into which the sum of 1% of every contract awarded to any operator, 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 fund manager, with international best practices. so, there is no question of utilizing the fund for 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 and procedures that accessing other form of institutional financing would require. Therefore the act is not necessarily targeted at assisting SMES alone

Challenges facing the Small and Medium Enterprises (SMEs) ..are not limited to financing alone

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

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

Financing Options

..talk to your Financial adviser

Accessing Funds Options

Private Sector Versus Public Sector

 For private sector sources choice of financing depends on the companys stage in its life cycle which generally follows the pattern below
Private Placement

Growing

Matured

Hybrid

Corporate Bond

Debt Financing Options

Money Market
Term loan Commercial Papers Overdrafts Leasing

Capital market
- Corporate Bonds

European Union (EU) EU-15: > than 75% of SMEs in the EU-15 have sufficient financing NMS:<than 66% of SMEs in the New Member States have sufficient financing Banks are the financial institution most used by SMEs

SOURCES OF SME FINANCING IN THE EU EU 15 (%) Banks Leasing /Rent companies Public institutions supporting investments Private Investors Private finance companies excluding banks Venture capital companies Others 79 24 11 7 4 2 2 EU 12 (%) 66 35 11 8 3 1 7

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 (%) Internal Funds 75 New investments(%) 70

Equity
Banks Informal Barrowings Trade Credit Credit Card Leasing Government Others

11
13 5 5 2 1.5 0 2.5

11.5
5 5 3 0 2.5 3 2

%
100

Bank Lending as a Percentage of GDP Nigeria

91.4

90 80

Private Sector Public Sector Sector

79.7 64.8

70

Total
60 50 40

59.8 47.8 32.1 23.7 32.7 39.2 40.5 31.6

30
20 10 0 2006

28.0 13.7 14.3

24.1

2007

2008

2009

2010

Source : CBN 2010 report

Equity Financing Options: Private Company

Public Company
Special Placing Rights Issue Initial Public Offer Offer for Subscription Hybrid Offer
NB: (All require SECs approval)

Private Equity
Private Placement

Rights Issue
Venture Capital
NB: (Above, does not require SECs approval)

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

There is a wide array of types and styles of private equity and the term private 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 equity investments 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 company ranging from early stage capital used for the launch of start-up companies to late stage and growth capital that is often used to fund expansion of existing business

Growth capital - refers to equity investments, most often minority investments, in more mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business. Leveraged buyout - refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage.

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 is involved

Market Capitalization as % of GDP

56.0

60.0 50.0 40.0 30.0 20.0 10.0 0.0 2006 Source : CBN 2010 report

39.0 33.6 28.5

28.1

2007

2008

2009

2010

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 other equipment 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 the business has the actual use of it.
Table 1: Equipment leasing volumes by sector (2006- 2010)1
Manufacturing Transport Agriculture 2006 39,996,226 37,196,613 2,296,554 2007 56,904,120 52,063,830 6,019,650 2008 69,778,800 80,245,620 34,889,400 2009 87,244,500 100,307,025 43,611,750 2010 91,595,175 137,420,624.25 44,483,985

Oil and Gas

Government Telecom Others Total Note: 1N thousands.

82,491,328
1,607,560 24,797,735 1,495,114 189,881,130

87,125,220
3,071,250 38,181,780 2,334,150 245,700,000

87,223,500
27,911,520 41,867,280 6,977,880 348,894,000

109,156,525
43,889,400 52,334,100 8,722,350 445,265,650

152,819,135
46,083,870 56,520,828 8,984,020.50 537,907,637.75

Advantages of leasing
Added Credit Availability Bank credit lines are not affected, so you retain your bank borrowing capacity for other needs. Conserves Working Capital Financing Equipment leasing finances 100% of the equipment cost, leaving precious working capital for other needs. Improves Cash Flow Equipment leasing allows you to pay for the equipment as income is earned from its use. 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 other equipment financing alternatives.

Various governments in Nigeria, and with the assistance from international financial institutions have attempted to address the problems of high transaction costs and risks by creating subsidized credit programmes and/or providing loan through:
Rural Banking Scheme - defunct Peoples Bank - defunct Small Scale Industries Credit Scheme (SSICS) - defunct Nigeria Industrial Development Bank (NIDB) - defunct Nigerian Bank for Commerce and Industry (NBCI) - defunct Agricultural credit Guarantee Fund - live Nigeria Export Import Bank - live National Economic Reconstruction Fund (NERFUND) - defunct Community Banks (later micro finance banks) - live World Bank Loan Scheme (SME I & II Loan Scheme) - live Small and Medium Industries Equity Investment Scheme (SMIEIS) - live

The aim was to provide either long-term credit or specialized services to the SMEs. Unfortunately, these projects have often fostered a culture of nonrepayment or failed to reach the target group or achieve financial self sustainability. The financial policies pursued were of interventionism with governments influencing 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 Fund new Unlocking Pension Fund for financing infrastructure new

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

For Public Sector sources the only choice appear to be through the bank of industry

Who Can BOI Assist ? Small, medium and large enterprises, excluding cottage industries. New or existing companies, seeking expansion, modernization or diversification. Credit worthy promoters who will be required to prove their commitment to the project by contributing at least 25% of the project cost excluding land. Borrowers whose management capability, financial situation (including availability of collateral and guarantee), character and reputation are incontrovertible. Clients with demonstrable ability to meet loan repayments. Borrowers with no record of unpaid loans to erstwhile development finance institutions and other banks

Project Selection Criteria (BOI) The bank's emphasis is on prudent project selection and management, accordingly, it supports 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 or regional 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.

 Approach to development (BOI)

Source : BOI Website

CBN Loan Guarantee Schemes

The N200 billion Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) In March 2010, the Central Bank of Nigeria (CBN) established the N200 billion Small and Medium Enterprises Credit Guarantee Scheme (SMECGS), for promoting access to credit by 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 an enterprise that has asset base (excluding land) of between N5million N500 million and labour force of between 11 and 300 Maximum Loan amount is N100 million which can be in the form of Working Capital, Term Loans 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.

National Content Development Fund (NCDF) 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 Proof that the investment would be able to repay the loan.

Packaging SMEs For Assessing Finance .. what Financiers Would Like to See

Information financiers require for decision making

Business Plan

Accounts

Tools Financiers require for decision making

Ownershi p profile /Managem ent

Cashflow projection s (usually 3 years)

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

Areas financiers focus on

Entrepreneur / Management Business description Product/ service description Location advantage Customer description Competitive Advantage Financing Requirement Costing & Pricing Sales and Justification for sales Marketing Plan Business Strategic plan

Contents of a Business Plan

Cover Page Executive Summary Table of Contents IV. The Business
Description of the Business Industry Analysis Vision Statement Vision Trigger Mission Statement Business Objectives Marketing Competitive Analysis Legal Structure Management Expertise Support Personnel Financial Information

Business Operations

Financial Planning Tools

Summary Supporting Documentation

Reasons why financing requests are declined

The reason for rejection is usually centered along three main points
Appropriateness of the funding to the business needs

The Entrepreneur

The viability of the business

The Entrepreneur
Doubtful commitment Still in paid employment Put your money where your mouth is No credible track record Quantum of funding required too much compared to net worth/ historical cash managed No experience or in-depth knowledge in the intended trade and no mitigating strategies proffered Serial entrepreneur no focus, no staying power KYC Highly indebted or High political connected people

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)

Appropriateness of the funding to the business needs

Common Rules The more unsteady your cash flow more 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 operation e.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?

 However publicly quoted companies have greater access to finance than SMEs But first; SMEs would have to transform

Transforming From a Private Company into a Public Company ..will require a paradigm shift

Why Transform?

There are advantages should a private company decides to remain private:

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 paperwork because of the regulations

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

Final takes
The first step should not be rushing to the financial markets (private and/or public), when housekeeping issues are gaping
Engage an adviser to assist in revalidating your vision, mission & strategy Determine financial strategy thereafter These improves your chances of success in the financial markets

Thank you