Posted on October 5, 2021
On the side-line of the signing ceremony for its debut N10.5billion 20-Year Series I Bond under the N50 billion Note Programme, GODDY EGENE had a chat with the Chief Finance Officer of Lagos Free Zone Company (LFZC), Mr. Ashish Khemka, to discuss the strategy of one of the most active and pioneer private sector-led special economic zones and its benefits to the nation’s economy. Excerpts:
The Nigerian Export Processing Zone Authority (NEPZA) recently noted that only 14 of the 42 licensed Free Zones in Nigeria are functional. How has Lagos Free Zone Company ensured its continuous operation and growth, despite challenges undermining the operations of two-third of licensed Free zones in the country?
Thanks. A critical part of our success story is the commitment of our promoter, Tolaram, especially in ensuring consistent investment in world-class infrastructure that meets the need and expectations of global multinationals. This early stage investment in critical infrastructure (e.g. roads, access to power, security, medical services, etc.) has literally brought the zone to life, enabling us to host a number of multinational industrial and consumer goods tenants. As a Free Zone development company, we understand and effectively deliver on our role as an enabler of business. More so, as one of the pioneer Free Zones in the country, we have a well-thought-out strategy that is diligently being implemented, with full financing and strategic support from Tolaram, which has operations in 12 countries in three continents.
We understand the critical role and significance of Free Zone to the industrialisation of many emerging markets and thus are keen to ensure the achievement of our objective of catalysing Foreign Direct Investment (FDI) inflow to Nigeria to stimulate industrialisation, enhance backward and forward integration relevant to developing the local supply chains and ultimately engender economic diversification and growth.
What is the unique attraction of Free Zones, and more importantly what does Lagos Free Zone offers that suggest its uniqueness and attraction for local and multinational brands?
Free Zones are special economic zones that offer tax incentives to attract foreign direct investments into the country. Besides this generic attraction, which most country’s Free zone provides, Lagos Free Zone provides convenience to investors seeking to explore the vast opportunities in the real sector of the Nigerian economy, offering them everything they need to grow their business and at the same time, live a comfortable life away from home.
Lagos Free Zone Company provides world class infrastructure that ensures companies are able to focus on their core operations and ensure their global competitiveness. With us, new industrial companies entering into Nigeria do not need to commit financial and management resources into generic infrastructures, which often times elongate the gestation period of entrants to new markets and can potentially become a major source of capital erosion, especially with the nuances that comes with such adventure. We have taken care of all of these infrastructures, providing an enabling environment conducive for business, thereby easing the cost of doing business in Nigeria. What is even better is the high level of collaboration between Lagos Free Zone and government entities to further ease the operations and ensure the smooth establishment of new companies. Beyond all of this, the Lagos Free Zone is positioned to offer something which no other free zone has direct access to: the Lekki Deep Sea Port, which is being developed by Tolaram and other private and public stakeholders, with expected commissioning in Q4 2022.
Some Free Zones are mainly for oil & gas whilst some focus on agriculture, what are the target sectors for Lagos Free Zone?
Key target sectors for the Lagos Free Zone can be broken into three components, with Industrial being easily the largest, followed by the Logistics sector and the Real Estate sector. Within the Industrial sector are six (6) sub-groups, namely:Food & Beverages;Non-Metallic Minerals;Engineering;Pharmaceuticals; Chemicals & Downstream;Paper and other industries. And within the Logistics component, the zone has the 90-hectare container terminal, dry bulk terminal, truck parks and warehousing facilities. Real Estate comprises a mix of commercial real estate for companies and service providers operating in the zone, along with residential development to make the zone a mixed-use development for work, live and play.
Foreign direct investment(FDI) has been at historic-low, what role can Lagos Free Zone and perhaps other Free Zones play in changing this narrative and what policy support is required?
Whilst the COVID-19 pandemic undermined global capital flows, it is pertinent to say that the compelling opportunity in Nigeria deserves much more FDIs and indigenous capital formation than we currently experience. Notably, the Nigerian Bureau of Statistics reported barely $78million foreign direct investment in the second quarter of the year, reflecting the low capital formation, high unemployment rates especially amongst youths and indeed an underlying reason for the perennial weakness of the Naira, as import bills remain elevated. A neighbouring country, Ghana, with less population and smaller GDP recorded $874 million FDI in the first half of the year, signifying the appetite of global brands in participating in the gradual industrial revolution that should redefine Africa in the near to medium term. Nigeria needs annual capital formation of at least 20 per cent of GDP to trigger the desired industrial revolution that can create inclusive growth and generate sustainable prosperity for the estimated 200milion Nigerians. As you know, the world often sees Africa as one continent with many similarities and limited differentiation, hence each country within the continent needs to appropriately position itself as the best destination for capital flows.
This is exactly what Lagos Free Zone is doing and this is why we are making continuous investment in sustaining our world class infrastructure. We have attracted some of the world most famous brands, including, Colgate, BASF, China Harbour, Indofood, Arla and of course Kellogg’s, the world’s number one cereal manufacturer. Beyond the generic tax and levy incentives, we are offering globally competitive infrastructure that simplifies the entry of and operationalisation of new global brands and indigenous start-ups in the country, and more importantly our facilities enhance the productivity and competitiveness of companies within Lagos Free Zone, thus enhancing the returns on investment. We have a disciplined culture of execution and service delivery, thus investors are assured of a sustainable eco-system, as we advance our infrastructure development to bolster the influx of investors into the Free Zone, in addition to leveraging neighbouring infrastructures, such as the Lekki Port.
The government through the Nigerian Export Processing Zone Authority (NEPZA) may advance the attractiveness of Free Zones through enhanced integration of policies on immigration, taxes, permits and licensing, with the objective of ensuring seamless approvals and administration of the rights conferred on Free Zones and the companies operating within the Zones. It is also important to avoid proliferation of Free Zones, but rather focus on enhancing infrastructure development in viable Zones for national interest by facilitating the parallel development of critical linkage infrastructure (e.g. national road and rail networks), either through direct investment, tax rebate programmes or third party concessions.
Earlier in the day, you did a signing ceremony for your just concluded debut N10.5billion 20-year Fixed Rate Corporate Infrastructure Bonds Due 2041, the first 20-year in the history of the Nigerian debt capital market. What is the significance of this transaction and what’s would be your interaction with the capital market going forward?
Thanks. The transaction is a major milestone for us, as it signifies our strategy to democratise the investment opportunity in the Lagos Free Zone. It is a transformational journey that requires broader investor base, especially domestic institutional investors. With the success of this debut local currency bond, which has demonstrated the appetite and commitment of domestic institutional investors, especially pension funds, in investing in critical infrastructure, we have further matched our assets and liability profile by ensuring that our debt capital is long-tenored to match the long-term assets held by the zone and the predictable long-term cashflow pattern of the Lagos Free Zone. We have set a new benchmark for the corporate debt market, being the first twenty-year corporate bond in the history of Nigerian capital market. We would further our engagement with stakeholders in the Nigerian capital market, as we hope to deepen our participation in the growth of the Nigerian capital market. This debut issue is the first series of a N50 billion Programme and we hope to list the bonds on both the NGX Exchange and FMDQ Exchange to ensure secondary market liquidity for the Bonds.
How do you see this capital raise impacting the progress of your infrastructure development and expectation of attracting more companies to the Lagos Free Zone.?
The successful issuance of Nigeria’s first 20-year corporate bond was an important milestone, as it diversifies our debt and equity funding sources to include domestic institutional investors, including pension fund administrators, insurance companies, asset managers and others. By ensuring broad investor participation in this Series 1 bond issuance, these same investors will be able to closely watch LFZC deliver on our infrastructure investment progamme in the zone and meet our financial obligations on the bonds, thus enabling follow-on debt and/or equity issuances in upcoming years. This diversification of funding sources has boosted the confidence of Lagos Free Zone Company and our promoter Tolaram to ensure that all infrastructure developments remain fully on track, including the commissioning of the Lekki Deep Sea Port and all critical infrastructure works within the zone – e.g. the container terminal, roads, medical services, security, power plant, warehouses, piped natural gas, dry bulk terminal, etc.
How vital was the guarantee of InfraCredit to the success of the transaction?
Having credit enhancement support from InfraCredit in the form of an unconditional, irrevocable guarantee to bondholders of the timely payment of principal and interest by Lagos Free Zone Company over the 20-year life of the bonds was vital to the success of the bond issue, which was well-oversubscribed. The guarantee enabled the Lagos Free Zone Company’s bonds to inherit InfraCredit’s AAA credit rating, reflecting full risk mitigation for investors especially given that this is the first 20 year corporate infrastructure bond they have invested in. Based on the structure, investors in the Lagos Free Zone Company’s bonds are protected by both the underlying project, as well as InfraCredit’s guarantee in the highly unlikely event of any underlying challenges for the Company. Thus, InfraCredit’s guarantee increased the appetite of pension fund administrators and other investors to participate in the bond issue and price the debt instrument in a manner reflecting its ‘AAA’ credit rating.
What is the target investment in the Lagos Free Zone and how much of this have you realised over the past 13 years of your operation?
To date, we have developed 200 hectares of the 830-hectare zone, which is about one-quarter of the zone. The bulk of this development occurred over the past 24 months, after the Lekki Deep Sea Port project achieved its financial close in 2019. As such, we have 630 additional hectares available for further development over the next 10-15 years, which will host critical infrastructure, industrial companies, logistics firms and also real estate development.
What has been the benefits of Lagos Free Zone to the Nigerian economy and how does the government benefit from the Zone, given the tax waivers.
Even with relatively limited operations to date, Lagos Free Zone has already facilitated a dramatic increase in employment, both in terms of infrastructure works (e.g. roads, security, etc.) as well as by hosting major multinational companies which have established their base within the zone, including Kellogg’s, Arla, Colgate Palmolive, BASF and others.With the expected commissioning of the Lekki Deep Sea Port in fourth quarter (Q4) 2022, we will continue heavily investing in the infrastructure development of the zone, thus materially boosting employment and also extending from industrial tenants into logistics, commercial and real estate developments which will make the zone an attractive place to live, work and play.
For the Nigerian government, the dramatic increase in employment and quality of life will significantly boost collection of payroll and value-added taxes, while the facilitation of exportation of Nigerian-made goods will grow the export-earning capacity of the nation and reduce pressure on the national currency. In addition, the combination of the Lekki Deep Sea Port and our adjacent Lagos Free Zone will significantly drive down the cost of goods for Nigerian consumers, by de-bottlenecking the supply chain constraints which currently plague other ports and free zones.
