Promoting infrastructure projects

Nigeria’s much-talked-about jobless economic growth is faced with cavernous roadblocks. Long-term capital to build roads, railways, seaports and airports is not growing apace with the economy. Can project sponsors turn to domestic institutional investors by issuing “Infrastructure Project Bonds”? Yes, reckons the African Development Bank (AfDB) in a new report, “Structured Finance: Conditions for Infrastructure Project Bonds in African Markets”.

Infrastructure – soft and hard – includes physical and intangible assets, e.g., roads and people who provide related services. AfDB says the infrastructure bonds will fund stand-alone projects and be repaid through the cash generated from the projects.

So far, Nigeria has some of the conditions necessary for raising of long-term bonds that will engender mass participation as investors. Pension reforms have led to N5.2 trillion in contributions. Political and economic stability continues to attract foreign direct investment ($8.9 billion in 2012), coupled with the $21 billion in remittances back home by Nigerians in Diaspora in 2012 and the increase in foreign exchange assets Nigerians are holding privately. In addition, the Debt Management Office (DMO) has been able to issue long-dated bonds that mature as far as 2030.

Until now, corporate bonds have been issued by mainly telecoms, e.g., 17 local banks participated in the N470 billion loan to MTN Nigeria. But a new trend is emerging. Local banks will play prominent part in the N597 billion Dangote Industries plans to raise this year as well as in providing the N534 billion for the transmission grid.

What is absent, however, are a regulatory environment, risk mitigation instruments, say, investor guarantees in the form of fixed off-takes or partial risk guarantees. Besides, high interest rates are a disincentive, because Nigeria is still to get its fiscal act together. Nevertheless, the excruciatingly slow progress in the privatisation of the electricity industry is proving to be an invaluable learning curve for regulators and investors.

The AfDB report is timely, given the urgency to significantly scale up financing to address Nigeria’s large and growing infrastructure deficit alongside the emergence of growing middle class and a flourishing financial sector.

A sound domestic capital market, to enable African sovereign and corporate issuers to tap long-term finance, is critical to development. Emerging economies such as Chile, Brazil, Peru and Malaysia are currently using project bonds as a way to catalyse investors’ interest in infrastructure projects. According to Vincent Boamah, AfDB vice-president, Finance, “The report on Structured Finance in Sub-Saharan Africa: Conditions for Infrastructure Project Bonds is the latest addition to the ongoing efforts to harness more domestic resources for development, with particular emphasis on building Africa’s infrastructure.”

We commend AfDB’s effort to introduce initiatives that will improve the capacity of local capital markets, while we urge the Central Bank, Ministry of Finance and DMO, which have been keen on building a structured finance market, to follow through with policies that will enable construction of intermodal transport that connects the West African region.