If you live or work in Nigeria, you will have noticed the deplorable state of our infrastructure. Poor road networks, a lack of viable transport alternatives, inadequate housing, and epileptic power supply all come together to depress living standards, increase safety risks, and jeopardise productivity.
The National Integrated Infrastructure Master Plan (NIIMP) calls for an investment of ₦10 trillion a year in the first five years and a total of ₦915 trillion over the thirty years of the plan. In 2016, Nigeria achieved a record spend of ₦1 trillion on capital projects, a paltry sum and an illustration of the significant funding gap that beleaguers attempts to address the country's infrastructure deficit.
As infrastructure projects require substantial upfront costs to be paid back over a long term, financing for such projects should ideally be long term. In that sense, pension funds, being pools of savings accumulated over the working life of employees, fit this profile. With total assets over ₦6 trillion, how much of a role can they play?
Wither the pension funds?
Pension funds seek returns for contributors to the pension scheme but balance this with a strong focus on minimising the risk of losing the initial capital. In late 2016, the National Pension Commission (PenCom) released new guidelines for investing pension funds in infrastructure. Before this, total investment in infrastructure was capped at 5% of the fund. The new limit is 20%. However, there are specific guidelines about what projects qualify for investment. The project must be worth at least ₦5billion and should be viable. Loans must also be backed by guarantees, and there should be a clear route for investors to liquidate their investments when needed. These requirements are to ensure that the infrastructure projects invested in are as low risk as possible.
Barking up the wrong tree?
An OECD paper estimates global direct pension investments in infrastructure at around 1%. Leading countries Canada and Australia have about 5% of their assets invested in infrastructure, indicating that the maximum allowance of 20% set by PENCOM is quite generous. In fact, when the cap was 5%, barely 0.04% of the funds under management were invested in infrastructure-related assets. Low participation was not driven by restrictive regulations but by the lack of viable projects, a global challenge.
Looking at the requirements for investable projects, the first is size. Considering our infrastructure needs, there is no shortage of potential projects. The Lagos – Ibadan rail project is expected to cost ₦485 billion, and the 4th Mainland Bridge, ₦884 billion. The second condition is bankability. This may restrict us to projects that can generate a steady income stream. So while a toll road would qualify based on future toll revenues, investing in rehabilitating existing town roads would not.
A useful example is the Lekki-Epe Expressway project: an upgrade of an existing 49km road plus a 20km new-build extension. Revenues for paying back the original investment and for providing ongoing services and maintenance were to come from three toll plazas. However, in 2012, bowing to political pressures, the government deferred toll collection at the second toll plaza before eventually cancelling further tolling in 2015. This underscores the political risks inherent in public infrastructure investments and ties in the third requirement – guarantees.
Guarantees can take many forms but are usually issued by the government to take on some of the financing risks. For example, the government can guarantee to reimburse some of the investment if the project fails to deliver on its initial promise and revenues fall short of forecasts. In the case earlier discussed, the Lagos State government had to buy back the concession rights to keep the project alive after reneging on the tolling agreement.
The final requirement is the existence of exit opportunities. This could be a listing on the stock market – like the recently issued savings bond – or a transfer to strategic buyers, as in the case of Build-Operate-Transfer projects like the Lekki-Epe Expressway which was initially supposed to be transferred back to the government, but only after 30 years. Infrastructure projects struggle with this exit requirement, though infrastructure bonds have gained more traction in recent years.
Little drops make an ocean
Assuming all the roadblocks to investment are successfully navigated, 20% of the current pension fund balance of ₦6 trillion represents a further ₦1.2 trillion unlocked for infrastructural investment. Compared to the ₦10 trillion required and even factoring in accelerating pension fund growth, this amount does not come close to plugging the funding hole. However, the attention and effort expended in creating the market may still yield other benefits.
An interesting development is with guarantees. In January 2017, the Nigerian Sovereign Investment Authority set up InfraCredit to provide guarantees for infrastructure projects. This important step helps create a new class of non-government backed assets for funding infrastructural projects. Being private sector led, a lot of rigour is expected to go into the process of vetting projects, resulting in high investment ratings for qualified projects and translating to lower financing costs over project lifetimes.
This may be the real impact of the current effort. As high-quality infrastructure investment options come on-stream, Nigeria will attract more foreign direct investment, and perhaps even entice the diaspora to contribute, taking us beyond what is available in domestic pension funds.