Banks cannot fund $8bn yearly power needs alone, says analyst

Nigerian banks would need the support of institutional and foreign investors to fund the huge resources needed to drive various ongoing infrastructure projects, especially the over $8 billion required to meet the deficit in the power sector for the next 10 years.

Patrick Mgbenwelu, director and head, project and structured finance, FBN Capital Limited said this at the first FBN Capital Project and Infrastructure Finance Conference which held recently in Lagos.

According to him, specifically considering the nation’s power projects alone, about $8- $12 billion would be needed yearly for the next 10 years, to meet up with the large deficit of power demand and supply in the nation, which the banks alone would not be able to fund.

“This funding cannot come from the banks alone. There is the need for institutional investors and foreign investment to bridge the funding gap,” he noted, adding that Greenfield IPPs will emerge to bridge the energy gap, while government’s PPP commitment will fuel various infrastructure projects such as rails, roads, bridges, and airports among others.

Participants at the event were unanimous that although Nigeria’s vast natural resources and growing power and infrastructure demands has rightly garnered substantial interest from lenders and developers from across the globe, there remain challenges in ensuring the country’s huge potential is realised.

Mgbenwelu said multi-billion dollar government projects will require private sector involvement, therefore creating the need for Special Purpose Vehicles (SPVs) as obligator financial vehicles.

Highlighting the importance of infrastructure finance, he said investors can choose to approach finance institutions and seek funds either as a corporate entity or directly through the projects.

According to him, project finance as an option for accessing funds is an avenue for managing risk, instead of bearing them directly as a corporate organisation.

“Additional expansion funding can be raised with ease, subject to the project achieving steady state post completion. Project financing vehicles can be credit enhanced via a rating which can exceed that of the actual sponsors,” he said, adding that it also ensures and forces extreme financial and project management discipline.

Another edge this option has over corporate financing is that once the project completion is achieved, it can be used as a template for rolling out other projects.

Mgbenwelu explained that funding under such an option is primarily based on future cash-flow generating capacity of the project, hence, in the absence of tangible assets, the projects can still get funding, as opposed to corporate finance funding whose funding is generally asset-backed.

By: FEMI ASU