Nigeria’s total infrastructural stock comprising road, rail, power, airports, water, telecoms, and seaports has been estimated at 35 percent of gross domestic product (GDP) which is a far cry from emerging economies’ average of 70 percent, underscoring a deep need for private capital.
But private capital has been few and far between as guarantees for local currency debt instruments to finance big infrastructure projects in Nigeria have been lacking before the entry of InfraCredit, funded by the Nigerian Sovereign Investment Authority.
Yet, even InfraCredit’s total capital of $110 million is not enough to bridge Nigeria’s infrastructural gap. According to Nigeria’s National Integrated Infrastructure Masterplan (NIIM), Africa’s biggest economy requires $100 billion annually for the next 30 years to fix the country’s infrastructure deficit.
This looks like an uphill task considering the paltry allocations for capital expenditure in Nigeria’s budgets. Between 2016 and 2019, the Federal Government budgeted N8.372 trillion for capital expenditure with the highest budgetary allocation being N2.178 in 2018 representing 28 percent of estimated spend for that year.
South Africa, in contrast, spent N7.2 trillion (R283 billion) as capital expenditure in 2016 and N6.8 trillion (R271 billion) in 2017, according to figures from the country’s Department of Statistics.
The Nigerian Federal Government is yet to meet the target it set for itself in the Economic Recovery and Growth Plan (ERGP) which sought to invest US$30bn in infrastructure between 2017 and 2020, and ultimately attracting infrastructure investment of US$3trn by 2030.
“To succeed in this target, fixed capital formation (government spending on infrastructure) must outperform analysts’ forecasts and the government needs to ramp up its capacity,” said analysts at Deloitte in a report.
Against this backdrop, Babatunde Fashola, former minister of Power, Works and Housing, during his screening by the Senate on Monday, called for the introduction of a new N10 trillion bond to tackle Nigeria’s crumbling infrastructure.
“There is some opportunity to expand instrument like the Sukuk. We should consider something like a N10 trillion infrastructural bond issued in tranches to fund infrastructure and people can invest to address infrastructural challenges,” Fashola said.
A Sukuk is an investment certificate that represents the ownership interest of the holder in an asset or pool of assets. The certificate entitles the holder to receive income from the use of the assets. It is similar to a bond but differs slightly due to the absence of interest.
Fashola’s appeal is borne out of the success of Nigeria’s first N100 billion seven-year 15.74 percent Sukuk offer issued in 2017 which received over N132 billion subscriptions from 2,073 investors, according to the Debt Management Office (DMO).
“To attract that kind of investments (N10 trillion), the projects have to be viable but the problem has always been the absence of regulatory certainty and difficulty in securing guarantees from the government,” said Chuks Nwani, a Lagos-based energy lawyer.
Nwani said that rather than make the environment investment-friendly by respecting contract sanctity and providing guarantees that will give comfort to investors, Nigeria continues to spend scarce resources on huge infrastructure projects that private capital would address because of pecuniary motive.
The Lekki-Epe Express Toll Road Concession in Lagos which led to the upgrade of 49km of existing two-lane dual carriageway and the construction of a new 20km highway at the cost of $250 million was started through private capital. But there was massive opposition against tolls and the government eventually capitulated. Visionscape project in Lagos also ran into troubled waters but investors in both projects didn’t lose money because there were guarantees in place.
Nwani said because of trust deficit the Nigerian government has garnered, no investor would put his money in a project without a guarantee and assurance that the project will be commercially viable.
Wolemi Esan, an energy lawyer at Lagos-based law firm, Olaniwon Ajayi, said the absence of guarantees has stalled the 14 solar power projects the Nigerian government signed with investors since 2016.
Due to inadequate private capital, pension funds have provided a viable alternative for the Federal Government. Nigeria has recorded one of the fastest-growing pension fund markets of over N8.9 trillion and about 53 percent of this is funding various Federal Government bonds with some dedicated to infrastructure projects.
But there is only so much pension funds can finance. Based on the current PFA Investment Thresholds and Limits in the Regulation on Investment of Pension Fund Assets (2019) rules, the estimated minimum potential pension funds investable in eligible corporate bonds is N2 trillion.
“With a growing supply of capital from pension funds, and limited investment instruments to safely channel these long-term funds towards infrastructure, our market demands the creation of a funding tool that can facilitate the efficient allocation of this long-term capital into bankable infrastructure assets in a sustainable manner,” InfraCredit said in a report.