Each man is divided into 2 halves (the oppressing and liberating elements) and each fighting against the other. When the oppressing element dominates the liberating element, you become oppressor and vicious, otherwise, you become humane and tend to do the right thing. The sum total of these elements in all individuals, especially the elite determines the socio-political system that exists at any given period of time. The system is the net result, the balance sheet of the struggle between the oppressing forces and liberating forces.


With recession biting hard, life has become so difficult and opposite of what it used to be. The Federal, State governments, corporate organizations, individuals, etc. are adopting several strategies to survive and overcome the situation. From the center, the Federal government is focusing more on agriculture to diversify the economy via various schemes. One of such schemes is rice farming revolution. Uche Usim’ in the Daily Sun Newspaper of November 15, 2016 stated:
“For years, Nigeria has been spending huge sums of money importing rice. Between January 2012 and June 2015, Nigeria spent $2.41 billion on rice importation, according to records from the Central Bank of Nigeria (CBN). The trend has resulted in huge stocks of unsold rice cultivated by Nigeria farmers, and low operating capacities of many integrated rice mills in Nigeria. Last year President Muhammadu Buhari launched the Rice Anchor Borrowers’ Programme (RABP) in Birnin Kebbi, the Kebbi State capital, to bridge the rice and wheat sufficiency gap. Since then, the CBN has opened a finance access window for States willing to embrace the RABP. So far 13 States have cumulatively enjoyed N23 billion under scheme in what the CBN Governor, Godwin Emefiele, said was the beginning of a rice revolution in the country. The target is to end rice importation by the end of 2017….”
Apart from this recent CBN initiative to help rice farmers through the States, corporate organizations are equally working in same direction to ensure self-sufficiency in rice production. Companies like Olam Nigeria Limited, Dangote, etc. are working towards achieving self-sufficiency. Olam Nigeria Limited has a rice farm located at Ondorie in Nasarawa State with a total farmland of 12,920 hectares. Already 4,450 hectares are under cultivation, with a further 3,000 hectares on target for 2017/2018. Even some known rice producing States like Ebonyi, Abia, and of recent Anambra have all increased their production capacity.
Albeit this spirited intention of the CBN towards agricultural/rice revolution, one challenge that may portend danger and hindrance to its success is power. Abhinav Bhaska in his report (Powering Agriculture with renewable energy) succinctly highlighted this challenge and the need to focus on Renewable Energy Power Projects to solve this problem;
“One of the challenges faced by the Agricultural sector is power, to power agricultural equipment. The United Nations Food and Agriculture Organization projects that by 2050 global food production will need to increase 70 percent over 2005–2007 levels to meet the demand of a growing world population expected to reach 9.6 billion people. Agri-food supply chain accounts for 30% of the world’s energy consumption as reported by the International Renewable Energy Agency. To achieving universal energy access, de-coupling from fossil fuels, producing and consuming energy more efficiently, minimizing costly waste, preserving natural resource base, more attention should be given to using agricultural waste to generate electricity”
Ebonyi State – one of the major producers of rice in Nigeria, resonated, this energy challenge as well as the inherent environmental challenge arising from rice production. According to the State, there are about 425 mills operating in Abakaliki, especially within 300 square-meter area. Less than 50% of the mills/industries are connected to the grid. Even those industries connected, receive only around 4 to 5 hours of electricity per day and so utilize diesel generators for the remaining period of time to meet their electricity needs. These inefficient diesel drives lead to excessive CO2 emission, environmental pollution at the local level and increased operating cost. Apart from the energy problem, the rice husk constitutes environmental hazard at the Abakaliki rice cluster as it has not been put to any meaningful use since the cluster started around 1963. The husk mountains catches fire during dry season and burn through months and people fall into it and get burnt. In a bid to address these challenges, the State government, initiated and has concluded the bidding process for the building of a 5.5 MW Biomass energy plant for her Agricultural-Industrial cluster. The action of the State is commendable and other States, private investors should take a cue from it. Good enough, the platform has been set. There is room for an embedded generating plant. As well, the National Renewable Energy and Energy Efficiency Policy 2015 set a target for Nigeria to achieve 16% of its energy consumption from renewable sources by 2030, compares to only 0.8% renewable energy consumption in 2012.
No doubt, Biomass Renewable Energy is a veritable platform. Apart from seeing to the sustainability of the agricultural revolution, it will as well curb the problem of massive undersupply of power, currently being experienced, not only in Nigeria, but in most part of Africa. Even David Donnelly of Mazars LLP shares same opinion. According to him, “the prospects for renewable energy in Africa can only be understood in the context of the massive undersupply of power in most of the continent. Renewable energy investment is viable only when projects are implemented as part of a coherent plan to widen access to affordable electricity and improve the reliability of its supply”
The good news is that now in Africa, renewable energy sector has taken great strides. Clean Energy Africa Finance Guides in its 2016 edition rates South Africa, as the most advanced African renewables market, accounting for approximately 50% of all large-scale installed capacity across the continent. In April 2015, the South African government announced plans to procure an additional 6.3 GW through the highly successful Renewable Energy Independent Power Producer Procurement Programmme (REIPPPP). Around 13 GW of renewables power was to be procured through the programme. Even countries outside South Africa, where the power shortage is most acute are making strides in renewable energy. Egypt and Morocco established renewable energy programmes many years ago but many other countries have announced ambitious renewable energy targets. Since the beginning of 2013, 25 large scale renewable energy projects with an aggregate capacity of 2.1 GW have been brought online in Africa. 16 of these 25 large scale renewable plants are located in South Africa The majority of this capacity is located in South Africa, Morocco, Kenya and Egypt.
With the agricultural/rice revolution, the future is bright for biomass renewable energy. This is the time to take advantage of this current recession to increase our energy generation through an embedded biomass renewable energy from our agricultural revolution.
Biomass energy is electricity produces from biomass fuels. Biomass renewable energy plant converts abundant agricultural residue, such as maize cobs, rice husks, coffee husks, and cotton stalks; animal products and municipal solid waste into a clean fuel. It is electricity produced from biomass fuels.
“Biomass-based power systems are unique among non-hydro renewable power sources because of their wide range of applicability to a diverse set of needs. Biomass systems can be used for village-power applications in the 10–250 kW scale, for larger scale municipal electricity and heating applications, for industrial application such as hog-fuel boilers and black-liquor recovery boilers, in agricultural applications such as electricity and steam generation in the sugar cane industry, and for utility-scale electricity generation in the 100 MW scale. Biomass-based systems are the only non-hydro renewable source of electricity that can be used for base-load electricity generation” – Diji, C.J. PhD – International Journal of Engineering and Applied Sciences, June 2013. Vol. 3, No. 4.
Biomass plants could be driven through gasification, pyrolysis or combustion technology. The choice of technology for biomass conversion should be based on demonstrated minimum efficiency of at least 35% or higher. Combustion based technologies are more profitable over their life cycle than gasification and pyrolysis, despite higher operating costs (Caputo et al, 2005). It provides overall efficiency of conversion of inputs to power by 85% and is a reliable technology that provides continuous operation and supply of power with minimal waste generation and meets environment standard. Apart from generation of electricity, other advantages of Combustion Biomass plants are:
 Environmental friendly and from the process clean drinking water is produced.
 No toxic byproducts generation, but beneficial products like fertilizer/soil additive.
 Thermal energy can be generated from the starchy water for as fuel for cooking and rice boiling.
 Low capital investment, low maintenance, low operating and low skilled manpower.
Most modular Biomass Plants have project implementation schedule of about 15 months. Straight line return on investment could be as low as 2.45 years with tariff of about $.8/kwhr.
There are so many Biomass rice husks to power plants in India, Malaysia, Thailand, Indonesia and other parts of the world. Though, no Biomass Renewable Energy Plants in Nigeria yet, but the awareness is growing by the day, as can be seen in Ebonyi State case. Biomass renewable energy is a veritable platform for the sustainability of the Federal government agricultural revolution programmes.


Most risk and return models in finance start off with an asset that is defined as risk free and use the expected return on that asset as the risk free rate. The expected returns on risky investments are then measured relative to the risk free rate, with the risk creating an expected risk premium that is added on to the risk free rate. But what makes an asset risk free? And what do we do when we cannot find such an asset?  An asset is risk free if we know the expected returns on it with certainty – i.e. the actual return is always equal to the expected return. But an important question is under what conditions will the actual returns on an investment be equal to the expected returns? In order to answer this question, one has to look at two basic conditions that have to be met.

The first is that there can be no default risk. Essentially, this rules out any security issued by a private firm, since even the largest and safest firms have some measure of default risk. The only securities that have a chance of being risk free are government securities, not because governments are better run than corporations, but because they control the printing of currency. At least in nominal terms, they should be able to fulfill their promises. Even though this assumption is straightforward, it does not always hold, especially when governments (especially in emerging markets) refuse to honor claims made by previous regimes and when they borrow in currencies other than their own.  These assumptions are based on the fact that government does not default in local borrowing and also does not borrow long term locally. But there are emerging markets and even developed markets where it is feared that this assumption does/will not hold.


There is a second condition that riskless securities need to fulfill that is often forgotten. For an investment to have an actual return equal to its expected return there can be no reinvestment risk. To illustrate this point, assume that you are trying to estimate the expected return over a five-year period and that you want a risk free rate. For example, a six-month Treasury bill rate, while default free, will not be risk free, because there is the reinvestment risk of not knowing what the Treasury bill rate will be in six months. Even a 5-year treasury bond is not risk free, since the coupons on the bond will be reinvested at rates that cannot be predicted today. The risk free rate for a five-year time horizon has to be the expected return on a default-free (government) five-year zero coupon bond. This clearly has painful implications for anyone doing corporate finance or valuation, where expected returns often have to be estimated for periods ranging from one to ten years. A purist’s view of risk free rates would then require different risk free rates for each period and different expected return.


Therefore, governments in these markets are viewed as capable of defaulting in local borrowing, even in some developed markets. For example Greece 2 year bond yield is 347% (24th July 2012) compared to German bond of same duration that has a negative bond yield of -0.056%, (that means in Germany, instead of paying to loan out your money, you pay them to hold your money). For Greece, it means that investors are unwilling to buy the bond because they believe they will not get their investment back when the bond is due to pay back the principal.  Greek bond buyers are buying lottery tickets essentially. So why would investors not buy the Greece bond like the German bond? Is it not backed by same sovereignty power that made them risk-free assets?  The reason is for flight to quality or safety or risk off.  People are so scared of investing to lose so they prefer to have a guaranteed small loss than possible high loss by investing in something else.

Another reason in this particular example is that if you buy German bond what currency will you be paid in if they leave the euro zone as is likely?  A new Deutsche Mark would dramatically appreciate (at least for a short time) right after its release.  If you hold one of the German bonds you would make a huge return in the currency fluctuations.


However, to overcome this challenge, experts believe that in estimating the risk free rate, you look at and compare the rate at which big and safe local corporations borrow and use it as a base.  But these firms no matter how safe they seem default.  So it is believed that a rate marginally lower than this rate should be used.  You can also use interest rate parity and Treasury bond rate in any other base currency to arrive at the local borrowing rate, provided there are long-term forward dollar-denominated contracts in the currency.  However, the biggest limitation to this approach is that getting the forward rate for transactions beyond year 4 is very difficult in emerging markets.  You can also arrive at the rate by getting the local government default spread.  This could be gotten through the country’s currency rating.  For example, if Nigeria’s default rate is 2% and the currency’s rating is A i.e. 10%, the riskless rate is 8%. Riskless rate = Government bond rate – default rate.

Under conditions of high and unstable inflation, valuation is often done in real terms. Effectively, this means that cash flows are estimated using real growth rates and without allowing for the growth that comes from price inflation. To be consistent, the discount rates used in these cases have to be real discount rates. To get a real expected rate of return, we need to start with a real risk free rate. While government bills and bonds offer returns that are risk free in nominal terms, they are not risk free in real terms, since expected inflation can be volatile.  The standard approach of subtracting an expected inflation rate from the nominal interest rate to arrive at a real risk free rate provides at best an estimate of the real risk free rate.

The risk free rate used to come up with expected returns should be measured consistently with how the cash flows are measured. Thus, if cash flows are estimated in nominal Naira terms, the risk free rate will be the Nigeria Treasury bond rate. This also implies that it is not where a project or firm is domiciled that determines the choice of a risk free rate, but the currency in which the cash flows on the project or firm are estimated. Thus, Oando plc can be valued using cash flows estimated in Naira, discounted back at an expected return estimated using Nigerian long term government bond rate or it can be valued in British pounds, with both the cash flows and the risk free rate being the British pound rates. Given that the same project or firm can be valued in different currencies; will the final results always be consistent? If we assume purchasing power parity then differences in interest rates reflect differences in expected inflation rates. Both the cash flows and the discount rate are affected by expected inflation; thus, a low discount rate arising from a low risk free rate will be exactly offset by a decline in expected nominal growth rates for cash flows and the value will remain unchanged. If the difference in interest rates across two currencies does not adequately reflect the difference in expected inflation in these currencies, the values obtained using the different currencies can be different. In particular, projects and assets will be valued more highly when the currency used is the one with low interest rates relative to inflation. The risk, however, is that the interest rates will have to rise at some point to correct for this divergence, at which point the values will also converge.

Be that as it may, the most important thing for investor is to realize that for an investment to be worthwhile, (if the investment objective is majorly on good return) the expected return should be above the risk free rate, especially when one is investing outside the risk free assets.


By Idika Aja

NEC Endorses Alternative Funding For Oil & Gas

The National Economic Council (NEC), presided over by Nigeria’s Vice President, Professor Yemi Osinbajo, has endorsed a new funding regime for the oil and gas industry.

This will in turn, eliminate the often arduous and onerous cash call regime which has stalled  growth in the industry. The alternative funding stream had been approved earlier this week at the Federal Executive Council meeting and then presented to NEC, as the body mandated to come up with “measures necessary for the coordination of the economic planning efforts of the various governments of the federation”.

Under the previous arrangement, partners in the six JV operations were expected to contribute to the approved annual budget for all programmes in accordance to their equity holding, while profits and losses were similarly shared. The NNPC accounts for 60 per cent equity in all the JVs with ExxonMobil, Chevron, Total, Agip and Elf, and 55 per cent in the JV operated by Shell. Over the years, the NNPC found it difficult to meet its cash call obligations to the various JVs, resulting in development programmes in the industry often being scaled down or suspended for inadequate funding. Despite the government adopting various mechanisms to close the funding gap, it was difficult to meet such challenges on schedule, with significant impact on production and growth.

Minister of state for Petroleum, Ibe Kachikwu, who briefed State House Correspondents after the meeting, said: “the current upstream joint venture arrangement in Nigeria’s oil and gas industry, is unincorporated, meaning that NNPC and the International Oil Companies (IOC’s) partner in each joint venture as unique and separate.”According to the minister, from January to November 2016, under-funding of the NNPC cash calls is estimated at USD $2.3 billion. This is in addition to the inherited arrears estimated at USD $6.8 billion for 2015 year ending.  While the NNPC would be expected to pay the entire oil and gas revenues realized from the JV operations into the Federation Account, the minister said the production costs would be appropriated and paid monthly as Cash Calls to the JV operations from the NNPC and IOCs..

Based on negotiations, he said the $6.8 billion past cash calls burden on the Federation was reduced to $5.1 billion, with the balance to be paid as oil production output improved.

Under the new funding stream, Mr. Kachikwu said the JVs would become incorporated and source their own financing, freeing-up the government from the annual budgetary cash call obligations.  Also the technical cost of oil production in Nigeria would also come down from about $27 to $18 per barrel. The new arrangement is assured to scale up investments in the oil and gas sector, while also boosting production output and revenue significantly.

“For instance, net payment from oil production to the Federation Account is expected to peak under the new arrangement to about $18 billion by year 2020, while raising output to 3 million barrels per day,” Mr. Kachikwu explained.



Cash calls are requests for payment for anticipated future capital and operating expenditures, sent by joint venture operators to non-operating partners. Most joint operating agreements (JOAs) include a provision that allows the operator to issue cash calls to non-operating partners. When the company running SAP Joint Venture Accounting (JVA) operates a venture, that company issues operated cash calls to its non-operating partners. When the company running SAP JVA is a non-operating partner in a venture, that company receives non-operated cash calls from the operator of the venture.

Operated Cash Calls

Operated cash calls are requests to the non-operating partners of joint ventures for payment of expenses before they are incurred. The transactions are posted as two equal and opposite open items to a partner account. The items are posted with two different Special G/L Entry Indicators ( SEI ). Although the items update the same partner account, they update different general ledger accounts which are identified via the SEI . The open item is cleared when cash is received from the partner.

An operator can also post a cash call to itself. The entries produced by this type of cash call are posted as memo entries (representing both cash requested and cash received) directly to the billing ledger. The cash received is posted on the assumption that an appropriate transfer will be made from the operator bank account to the joint venture bank.

Non-Operated Cash Calls

Non-operated cash calls are requests for payment of prospective expenses received from an operator of a venture in which the company running SAP JVA is a non-operating partner. The transactions are posted as two open items to an operator vendor account. Like operated cash calls, the items are posted with two different SEIs , which update the same partner account, but different general ledger accounts. One open item is cleared with a cash payment to the operator. The other item is cleared manually in the non-operating company’s system with actual expenditures received in a non-operated bill from the operator.


Cash calls are often issued by the operator and paid by partners several months before expenditures are incurred. When this occurs, a reclassification process takes place.Reclassification is an SAP JVA process that has the following two major functions:

  • It creates an accounting record of cash call payments in the month when they are received

  • It applies cash call payments in the month when expenditures are incurred

The reclassification process accomplishes these two tasks by connecting the accounting entries related to the steps in the cash call process to two time values:

  • Billing month ( the month the expense appears on the bill to the customer)

  • Operations month (the month the payment is matched against the expenditure)

By using the billing and operations month, the SAP JVA reclassification process identifies the cash call payments that should be included in the partner’s current month bill. – Source, SAP manual –