By DAVID ADONRI

THE Capital Market is not an end in itself. It is means to an end. For it to be purposeful, the output generated from the Capital Market must align with the critical demands of the economy. If a Capital Market is allowed to follow its general pattern of allocation of capital resources by allocating in the order of payback period and internal rate of return, then projects of lesser strategic importance may inadvertently enjoy competitive edge. 

This is not an argument to undermine the normal market mechanism that underpins the allocative efficiency of the Capital Market. Rather, it is a proposition for making the market mechanism allocate in the strategic interest of the economy. As an illustration, the payback period for investment in an annual crop will always be lesser than that of a perennial crop, notwithstanding that in the long run, returns from the perennial crop will be much higher.

A normal market will allocate first to the annual crop based on market mechanism, thus sacrificing the higher long term perennial gains at the alter of immediate expediency. However, without distorting the market’s allocative efficiency, appropriate incentives or disincentives can be introduced to sway the market mechanism in the direction of long term gains. 

Although the Nigerian Capital Market has been efficient in the allocation of long term capital resources to many sectors of the economy since independence, it is yet to strike at the root of the economy. The Market has since inception formed enormous capital for the public sector, service sector and few light industries. 

The allocation of capital resources to these sectors came as a natural instinct for the Capital Market in order to adapt to the mercantile structure of the Nigerian economy and the prohibition placed by military administrations on private sector participation in heavy industries. It is no longer news that government’s monopoly eventually messed up Nigeria’s heavy industrial base.

Notwithstanding the misadventure of public finance in the heavy industrial sector, it can also be argued that due to the long gestation period for projects in this sector and their generally low internal rate of return, the heavy industrial sector stays at a competitive disadvantage in the natural course of allocative efficiency of the Capital Market. 

If after several years of allocating scarce capital resources to government, services and fragile light industries, the Nigerian economy is still heavily import dependent, mercantile, unindustrialized and without infrastructures, it means that the Capital Market is yet to strike at the root of the economy. The root holds a tree firmly to the ground. It is the superstructure upon which a tree thrives. This is what the heavy industrial base is for an economy that will last. 

A heavy industrial base consist of capabilities that make a domestic economy to produce machines and engineering equipment. It starts with the mining of ferrous and non-ferrous metals which in turn undergoes metallurgical processing to produce liquid metals, alloys, sheets and bars which are in turn fed into tools and machine-making industries for production of machinery and equipment.

The machinery and equipment are then used to construct various industries and also for production of capital and consumer goods. They are also used in building primary and secondary infrastructures. A heavy industrial base with its attendant engineering infrastructure enables an economy to be domesticated using domestic capital, human and natural resources.

A heavy industrial base is the foundation for technological breakthrough and industrialisation. It is the antidote to import dependence. Despite the critical importance of a heavy industrial base, it has not enjoyed any allocation of capital resources from the Capital Market. Some may erroneously argue that with the setting up of the Infrastructure Company, INFRACO, to mobilise infrastructure development fund to the tune of N3 trillion, FGN has already taken a bold step towards closing infrastructure finance gap.

INFRACO as a financing mechanism cannot substitute for the Capital Market which is limitless in its capacity to mobilise capital. Secondly, INFRACO is only pecking at the surface of the structural defects suffocating the economy. It is only addressing secondary infrastructure (roads, rail and ports).

It has nothing to offer to the critical heavy industrial base and production infrastructure (electric power, energy and chemical industries) which are the foundations for domestic production and building of all infrastructures without external borrowing. 

Nigeria is faced with an unsustainable age-long practice of importing capital and consumer goods and an opportunity to build a lasting economy utilizing her domestic factors. The Capital Market can tap into this opportunity if its capital allocative power can be channeled purposefully into prioritising capital flow to the country’s heavy industrial base and engineering infrastructure.

First, is the setting up or identification of corporate elements in these value chains and listing them on the Stock Exchange. Next is agenda-setting for these corporate entities in line with the country’s strategic production targets. Next, government should roll out incentives to attract investors to these enterprises.

Then finally, public offerings in order of priority, starting with mining, metallurgy, machine making, etc., should be undertaken. This deliberate action plan is the only way the strategic purpose of Nigeria’s Capital Market can be realised. It is only through this direction that the Capital Market can be catalytical in birthing an enduring and sustainable economic development in Nigeria. 

Adonri is Vice Chairman, Highcap Securities, Lagos