Financing Nigeria’s $3trn Infrastructure Deficit

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…here is the perspectives of stakeholders on infrastructure financing in the country as Nigeria strives to rebuild its economy, experts have continued to hammer on the need for building infrastructure that would trigger business growth and the development of the country.However a critical part of building infrastructure in Nigeria that has always been a challenge is financing.

About N1.7 trillion is needed now to deliver 206 federal roads covering over 6,000 kilometres with contract value at over N2 trillion, an estimated deficit of about 17.37 million housing units, from juxtaposing the population estimate of 182.2 million with fertility rate of 6.1. In the same vein, electricity, rail systems, airports, seaports are equally begging for financial attention.

The implication of these is that the country needs several trillions of naira to address its infrastructural deficits at a time the economy is financially challenged. While federal government, for years, has been sourcing for domestic and foreign funds to fix these infrastructures, the fund sourced is a quantum, compared to what is needed.

Experts in the infrastructure and finance sectors have postulated that the country needs to spend $3 trillion on economic infrastructure over the next 30 years, if it must meet its own ambitious development goals. Nigeria’s major infrastructure challenges lie with power, roads, healthcare and education amongst others. In recent times, the government has focused on fixing power and building road networks across the country.

However experts say while government must be a primary source of funding, federal and state governments’ fiscal inflows are grossly inadequate to match the pace of investments required in infrastructure.

Limited Resources Available to FG

According to the president and chief executive of the Africa Finance Corporation (AFC), Mr. Andrew Alli the Nigerian government ability to spend is limited based on what it earns. With extracts from the Nigeria Economic Recovery and Growth Plan 2017-2020 showing that the federal government’s medium-term fiscal framework forecasts deficits of N7.6 trillion from 2017 to 2019, he said this is evidence that the federal government resources are limited and additional resources will be needed.

Asides funding, Alli argued that money is not the problem of infrastructure financing, saying other challenges that needs to be addressed include: bad Procurement processes, structural problems that make it difficult for investors to get value for money, funding structure, maintenance, tolling, among others. He also, frowns at inadequate attention which Nigeria pays to meeting the needs of specific investors and projects already in progress, or on creating policy incentives that will spur investments.

Alli who was represented by a top executive of the corporation, Fowler Fagbule, at the 2017 annual conference of the Finance Correspondents Association of Nigeria (FICAN) focused on Infrastructure financing, noted that the power sector which was recently privatized, is still significantly government driven with challenges of transmission, gas supply, tariffs, payment security, and operational limits which has left the industry in critical state regarding suitability for long-term investment.

Need For Cost Reflective Tariff

The overall effect of this according to the AFC boss is that Nigeria still struggles to provide an adequate supply of reliable power to its population of approximately 170 million people, as generation capacity was still about 3,038 megawatts at March, 2017. He believes that the country should generate 5,000 megawatts by 2018.

“If we don’t have a cost reflective tariff, we will not have the kind of investment we want,” he stressed, expressing concern that despite its recent unbundling, “this industry is at a critical juncture in terms of privatization, liberalization and other conditions for long-term investment sustainability, both by public sector and private financiers. Both the public and private sides have fallen short of requirements to create a bankable and sustainable sector.”

Similarly, he said the transport sector is largely public financed (FGN) hence limited by annual fiscal constraints. The end result in Nigeria Alli added is that roads and rail typically get the most attention, but funding is “poor and opaque.”

Speaking on “Facilitating Infrastructure Financing in Nigeria: ICRC perspectives,” the acting director general of the Infrastructure Concession Regulatory Commission (ICRC), Engr. Chidi Kingsley Izuwah said that “private capital sanitises corruption because nobody borrows to go and pay a bribe.”

Transparency, PPP Way To Go

According to him, large transport infrastructure projects require investment capital beyond the capacity of the federal and state government in any single year, given the competing priorities, adding that external funding sources are inevitable for the long-term.

As case studies have shown in India, Kenya, South Africa, and even Zimbabwe, Izuwah said Nigeria requires stable, multi-year funding mechanisms independent of annual fiscal constraints, “to catalyze various long-term funding sources: banks, contractors, pensions, donors, multilateral agencies and bond markets.

“PPPs cannot by themselves bridge the gap. Government spending needs to be more smartly deployed, to achieve the best value for money in any given project, for example, through annuity payment contracts.” He lamented the presence of some major policy constraints to private investment inflows into infrastructure in Nigeria, broadly categorized into three areas: tariffs and regulations; public procurement approach and investment climate.

The ICRC boss further said natural gas monetization requires significant investment in prospecting, development, gathering, processing, production, transportation and delivery, following which as a result of the interdependencies in the value chain, highly specialized investors with strong appetite for onshore Nigeria risk are required. Similarly, he stressed that the mining sector requires significant prospecting, processing and transportation, all which requires lung-term funding.

According to him, private capital is a force for good, but a number of factors prevent Foreign Direct Investment (FDI) and cause diversion of capital to other countries where the investment climate is more favourable.

He highlighted some of the constraints to include: government controlled tariffs which are disincentives to investment just as incumbents limit scope for private sector participation; uncertainty, bureaucracy and opaqueness in contract bidding; preference for pay-to-build versus pay-for-service contract models. Others include the lack of transparency or due process in concession negotiations and awards; governments’ requirement for speed and haste to award contracts; limited investment in project preparation by ministries and agencies; securing permits, contracts, agreements which are major hurdle for investors.

A National Infrastructure Acupuncture Plan

Political will, according to him, is key to ensuring appropriate tariffs across sectors and projects, adding that most sub-sectors are still not open to investment specially rail and roads. His words: “Enhancing the investment climate and clearing roadblocks to investor entry is one major area where FGN can make a direct, near-term impact.”

He called for “a national infrastructure acupuncture plan. We need to choose the areas to put the pin. If we are not careful, our natural endowment (especially the location of Nigeria at the centre of the world) can become a problem.

Speaking from a private sector perspective, chief executive officer, Viathan Engineering Limited, which is into Private Power Plants (PPP), Mr. Ladi Sanni noted that Nigeria needs about $100million annually to begin proper infrastructure financing, which the government alone cannot provide, amidst concerns around political risk. He added that among other areas, the government needs to ensure that the judiciary understands that requirements of infrastructure financing.

“PPPs cannot by themselves bridge the gap. Government spending needs to be more smartly deployed, to achieve the best value for money in any given project, e.g. through annuity payment contracts.” Sanni said “part of the problem we have in Nigeria is contract sanctity. The Judiciary has a role in interpreting the legal framework for POP. Government needs to demonstrate that private investors can go onto long term investment with them. “Government bonds limits investment into high risk power project. We would like government to look at the issues of infrastructural bond.”

He however said there are a number of major policy constraints to private investment inflows into infrastructure in Nigeria, broadly categorized into three areas namely: tariffs and regulations; public procurement approach and investment climate.

Meanwhile experts in the pension industry had suggested that government could tap into the N6.5 trillion pension assets through floating of infrastructure bonds, but the body language of the government shows it could not meet the guidelines stipulated in the pension fund investment guidelines in the 2014 Pension Reforms Act(PRA) and the National Pension Commission(PenCom) is not ready to shift ground in a bid to safeguard the savings of workers.

Portfolio Investment In Infrastructure

However, some experts also implored insurance companies to invest in infrastructural development through Annuity, since it is a long term fund. No doubt, pension assets has grown to N6.5 trillion as at July, 2017 and 70 per cent , amounting to about N4 trillion of the N6.5 trillion pension assets are now invested in Federal Government securities, thereby, funding economic growth and development in the process.

This a fund invested in different portfolios such as the FGN bonds, treasury bills, domestic ordinary shares, local money market securities, corporate debt securities, real estate properties, state government securities, foreign domestic shares and cash/other assets.

Speaking on why the funds is growing, executive director, Crusader Sterling Pension, Mr. Conrad Ifode said, the investment income from pension assets was regarded as a key factor that keeps the fund growing at an acceptable rate, as the pension assets now has about N2.3 trillion as income from investment of the assets, adding that the security of the fund is also a crucial factor.

Speaking on behalf of operators, the Chairman, Pension Funds Operators of Nigeria (PenOp), Mr. Eguarekhide Longe, said its members are ready to invest in infrastructural bonds whenever the government decides to float them to finance key developmental projects. While debunking claims that PFAs don’t want to invest pension assets in infrastructure, he said the managers had requested the investment banking community to come out with products that abide by the investment guidelines in Pension Act, which operators can finance, noting that this has not been done.

“With about N4 trillion invested in infrastructural development through bonds, It shows you that the money has been active. So, the philosophy of managing this money is to add to it. It means that the money has been used profitably. Now if you think about how pension fund should be used and so on and its objectives, you find out that it is being used by the managers for the right objectives, so that when people retires, they earn their money seamlessly.

“The fact is that there are ample provisions in the investment guidelines that allows for investment in projects, so to say, infrastructure, private equities and real estates, bonds, among others.  But what has happened is not that the money is idle in the PFAs or that the fund managers have not looked for those projects. It is not their jobs to go and create projects, but we have actively sort the investment banking community to develop products that we can invest in,” he pointed out.

In the same vein, former chairman of PenOp, Dave Udeanu, called on the government to come up with projects that are backed up with adequate guarantee, stressing that most states have already invested part of the pension funds in infrastructure.



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