How local banks can build capacity for infrastructure financing —Igwilo

InfrastructureIN 2014, the National Integrated Infrastructure Master Plan estimated that financing Nigeria’s infrastructure would gulp $2.9 trillion in the next 30 years. At N360 per dollar exchange rate, government therefore requires N36 trillion annually for 30 years to meet the infrastructure development needs of the country.

Traditional funding from budgetary allocations to different levels of government can no longer meet this huge infrastructure requirement with the lean resources at government’s disposal.

But Dr. Jerry Igwilo, the Chief Financial Officer (CFO) of Heyden Petroleum Limited, is of the view that since the infrastructure need of the country is huge, government needs to come up with other exciting ways of funding these infrastructure development needs.

According to the former investment banker, the country’s huge infrastructure financing gap ironically presents great investment opportunity for local financial institutions.  He lamented that foreign financial institutions are taking this opportunity head-on, and making a lot of dividend out of it while local banks watch. He said that the Bank of China, for instance, was behind most of the construction projects by the Federal Government of Nigeria.

“The projects are being financed through CCECC, which is the major construction arm of Chinese government with their counterpart funding. The Nigerian private sector should have an opportunity to play in that space too. It is high time local financial institutions built capacity for project finance initiative to meet the funding challenge for infrastructure projects.

“In investment banking specifically, I also see an opportunity on the other side. One of the major challenges from the Nigerian perspective is getting the local liquidity for financing major infrastructure projects.

“I believe that the local financial institutions should build capacity around how to fund infrastructure projects, how to manage PPP projects, how to make sure that these projects are bankable abnitio, how to make sure that the individuals behind these projects are people with credibility who can keep to their words even when the going get tough.

“Those are the major ingredients that make project finance bankable. Those are the challenges but I believe there are opportunities for investment,” said the investment banker.

Dr. Igwilo speaks further on why local financial institutions, are not taking infrastructure finance opportunity for what it is, an investment deal with high profit returns.

 

Why Nigerian entities are not into project financing

In my view, first among the challenges is the required skills and knowledge. Because we haven’t done it, it is easy to read the books, get the qualification but if you haven’t experienced it hands on, you haven’t done it.

We can count a few PPP projects that are successful in Nigeria and if you go back and look at them, you will discover that they were mainly funded and sponsored by foreigners and not Nigerian institutions. From that perspective, you see there is a problem.

The second factor that needs to be looked into very critically is the depth of the financial market in Nigeria. We don’t have the liquidity to fund capital intensive projects with 20 to 30 years life span. Our funding outlook is usually short term and it is five years maximum. You cannot have funding mismatch and be able to make a project of that nature bankable.

Next is high interest rate. The interest rate applicable in our current environment is quite high when you compare it to what is obtainable elsewhere. Of course, when you look at it from the dollar exchange rate, and then add up the currency risk challenge. When you evaluate both side by side, you tend to get to where we are today.

The risk of our environment is also the issue. The fact that you cannot get an international company to insure Nigerian credit risk is also a major issue. All these are multiple perspectives which I believe will take long term strategy to resolve. But I believe if we don’t start today we might not even get to a solution. So the earlier we start the better for us all.

 

Tax credit insufficient to meet infrastructure financing expectations

Tax Credit is one of various incentives for businesses to make investments in economic infrastructure development or operate in critical sectors of the economy where intervention is urgently required.

While it comes in many forms, tax credit is authorized incentive to implement public policy and encourage the private sector to provide a public benefit, allowing participating taxpayers reduction of their tax liability for investments in projects that probably would not occur but for the credits.

In simple terms, tax credit implies that a company may owe on tax as a going concern, say N40 billion to N50 billion covering 20 or 30 years and use it to build critical assets.

According to Dr. Igwilo, tax credit is a strategic option for financing infrastructure citing the reconstruction of the Apapa Road in Lagos by the Dangote Group as good example of key project finance deal based on tax credit.

However, “If you remove Dangote Group as a conglomerate, which other company in the country has a bouquet of experiences and businesses that has substantial tax liability on a yearly basis that could benefit from this arrangement? They are very limited which implies that there is a capacity issue,” Dr. Igwilo stated.

And of course, we have high expectations in terms of where we need to be, where our infrastructure development level need to be vis-à-vis our population growth of 3 per cent annually, and where we want to be in the comity of nations.

Without infrastructure, be it roads, electricity, water, waste management, hospital, schools, Nigeria cannot compete in the next 20 to 30 years. Government needs to start today from somewhere, and then the solution is not one dimensional; it is multiple dimensional and then we can have companies participate in that field.

 

Credit Enhancements, good strategy from other jurisdictions

Findings reveal an urgent need for credit enhancement in order to enkindle the appetite of institutional investors in infrastructure financing.

Credit enhancements are a kind of revenue shortfall guarantee that lenders to infrastructure projects will be repaid in full and on time, irrespective of project performance and are typically provided by international finance institutions to facilitate appetite of institutional investors in Infrastructure related securities. The inclusion of credit enhancements in the structuring of fixed instruments like bonds enhances marketability but it can however be very expensive.

The Nigeria Sovereign Investment Authority has established a credit enhancement facility (InfraCredit) in partnership with London-based GuarantCo, to provide enhancements for infrastructure bonds.

GuarantCo facilitates infrastructure development in low income countries by providing credit guarantees denominated in local currency to financial institutions and bond investors. InfraCredit will provide a form of monoline insurance, allowing pension funds and insurance companies to invest in otherwise ineligible securities.

In recent times, the Federal Government has shown a willingness to provide enhancements for key infrastructure projects, in the form of revenue shortfall guarantees.

This process is however far from streamlined. There is no standard guarantee product with clear qualifying requirements and backing of projects is done on a case by case basis. It is posited that the country’s infrastructure finance landscape is more than ripe for a scheme along the lines of the UK’s Infrastructure Guarantee Scheme, under which the Treasury guarantees that lenders to infrastructure projects will be repaid in full and on time, irrespective of project performance.

The Scheme transfers project risk to government and ultimately the taxpayer, in return for a fee. Once the Treasury has issued a guarantee it cannot withdraw it or change the fee if project risk or market prices change. Most importantly, the Scheme has clearly defined parameters for eligibility.

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