Experts on Saturday in Lagos challenged operators in the Nigerian capital market to develop various products capable of attracting financing to fix the nation’s ailing and even inexistent critical infrastructure needed to ensure the economic grows at the same pace as, if not, faster than the rate of population.
Speaking as part of a panel discussion during the 2019 annual workshop of the Capital Market Correspondents Association of Nigeria (CAMCAN), on Saturday, December 7, with the theme “Bridging Nigeria’s Infrastructure Gap: the capital market option,” the experts agreed that the nation’s entire N10.59tr 2020 Appropriation Bill passed by the Senate on Thursday is a mere drop in the ocean. They noted that the budget translates to just about 5.8bn dollars, most of which is for recurrent expenditure and servicing of existing debt obligations.
In a presentation on the theme of the workshop, Oluseun Olatidoye, Head, Debt Capital Markets at FBNQuest Merchant Bank Limited, challenged stakeholders in the nation’s capital market to seek outside of the box what he called “reliable financing.” This, he noted, “is even more worrisome, given the bourgeoning deficits courtesy of the increasing decadence in the existing infrastructure, poor funding, and corruption.”
Although the orthodox financing source for Nigeria’s infrastructure, he continued, has been through fiscal channels, which have become unreliable.
The need for innovative financing for national infrastructure, he stressed, has become very urgent, given that taxes and oil proceeds, major revenue sources for the federal government, even when the economy grew at an average of 6% annually, were still insufficient to bridge the infrastructure gap.
Olatidoye argued that the ongoing efforts “to tax the economy to prosperity remains largely contentious, (especially given) the nascent comments that oil prices might have reached its peak adds another concern.”
Noting the disequilibrium in the state of Nigeria’s infrastructure (with supply failing to meet demand), the guest speaker drew attention to its waning quality, as shown in the 2019 Global Competitiveness Index, which ranked Nigeria 130 out of 141 countries in terms of the state of its infrastructure. Another pointer to the deficit, he added, is the country’s power generation capacity at a third of its installed capacity of 12,522 megawatts. No wonder, he alluded to estimates that 86% of Nigerian companies use generators to power their offices and factories.
The quest for improved economy and capital inflow to the country, he warned, will continue to be hampered by the infrastructural decadence, which will further worsen living standards.
Making a case for improved funding for infrastructure, he said by spending a mere average 3.6% of GDP on public infrastructure between 2007 and 2017, Nigeria today lags behind South Africa’s 4.8% and 4.7% in India.
Even then, when considered on a per capita basis, he argued further, Nigeria’s public capital is less than half of the Sub-Sahara average.
“The increasing demand for infrastructure in Nigeria is largely tied to her rising population, and more specifically the teeming urbanization (50% of Nigerians live in urban areas). It is estimated that the current population would have ballooned to about 330m people in the next 21 years, making Nigeria the fourth most populous country by 2040, behind India, China, and the US.”
Expectedly, he said this would pile more pressure on the existing facilities, while the government’s financing capacity will even become more challenged.
It is not difficult, he says, to determine that creative financing is needed in the power value-chain; healthcare where budgetary allocation is meagre and below global standards; as well as roads, he says only 16% of Nigerian roads are paved, a gap the Minister of Works and Housing estimated recently will require about N300bn to fund in (federal) road infrastructure.
He cited a survey by the Association of Chartered Certified Accountants (ACCA), indicating that lack of finance ranked the second barrier to infrastructure funding, behind lack of political will. This, he said, is a pointer to the need for a workable funding plan, supported by a strong spirit of transformation through legal, regulatory and economic system reforms to ensure strong investor confidence.
“There has to be a legal framework for an arbitration process that will be honoured, without which no one will (invest in the country). Trust in government is too low, nobody trusts our government enough to invest their funds… It is a trust issue, the government needs to demonstrate that it can be trusted,” he added.
Besides the need for sound macroeconomic and policy frameworks as pre-conditions, for attracting infrastructural financing through the capital market, he believes market forces must be allowed to take charge. The role of government and, as such political interference is limited, insuring “investors against any form of political risk, and most importantly corruption, which has the potential of crippling the entire endeavour.
Added to this, he believes, is the need to address foreign exchange volatility in the ‘most market’ approach to sustain the interest of foreign counterparties.
“Depending on the structure of the bond, projects could be of a nature that exposes the financiers to devaluation risks, which will whittle down the dollar value of local currency cash flow from such projects.
He also noted the unwillingness of state governments open their books for investor scrutiny as one reason they are not approaching the capital market for their funding needs, which calls for more education on the inherent benefits. He proposed a situation where the states and federal government approach the market for funding of specific infrastructure/projects, rather than many projects at the same time, because of accountability.
The Nigerian capital market, he believes, for example, can create a product to source funds for a world-class airport project, with the Federal Government only required to provide a sovereign guaranty, ensuring that there are risk-mitigating factors are in place. The risks around the project can be securitized, while revenue from the project over time is relied upon to repay investors.
Speaking on the topic as part of a panel, Mrs Isioma Lawal, Head, Internal Control Department at the Central Securities Clearing System Plc (CSCS) said transparency and safety of investment are key to attracting project funding.
For Jude Chiemeka, Divisional Head, Trading Business at the Nigerian Stock Exchange (NSE), given the dwindling government revenue, there is the need for it to partner the private sector, lamenting the rising rate of governments foreign borrowing and the attendant funds’ mismatch with the dangling risk of devaluation ever-present.
On its part, he assured that the NSE management has been creating the framework around attracting infrastructure capital, resulting in its recent signing of a Memorandum of Understanding (MoU) with the Luxembourg Stock Exchange, the leading bourse for green funding. The agreement is expected to enhance the inflow of green financing.
The Sukuk as a financing model, he recalled, is one that has worked well for the country.
Okey Umeano, a representative of the Chief Economist, Securities and Exchange Commission (SEC), urged market stakeholders to help the government with funding and product ideas raise the capital needed for infrastructure. The government on its part, he continued, needs to stop policy somersault, calling for laws that separate project funds from the government of the day to avoid any interference.
For Sufian Abdulkarim, Head, External Relations at the commission, who represented the acting Director-General, Ms. Mary Uduk, it is unfortunate that projects are shabbily done and the government has to repeat them after one year. The reason, he stressed, is the lack of consequences for bad behaviour over the years.