The Nigerian Project Finance Landscape

Amidst the current trends of urbanisation, industrialisation and a rising middle class, the need for sustainable infrastructure in Nigeria has rarely been greater. It has been estimated by the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo Iweala, that Nigeria will need around ₦2.8 trillion ($14 billion) annually to close the nation’s infrastructure deficit. 

Traditionally, governments have financed the construction of roads, bridges and ports from their fiscal budgets, with little or no support from the private sector. However, this approach of financing has become outdated and is unlikely to return given the present economic pressures (i.e. falling oil prices, a deteriorating exchange rate and liquidity constraints) on the fiscal budget. As a result, the private sector has become increasingly involved in the creation of financing solutions to develop Nigeria’s decrepit infrastructure. Across frontier markets, ‘project finance’ has been widely recognized as the best method of financing the construction of large industrial projects.

According to the International Project Finance Association (IPFA), project finance is defined as the financing of infrastructure projects using a combination of debt and equity capital that is repaid by the cash flow generated by the project. Typically, lenders to the project have little or no claim on their loan in the event of the default. This innovative financing technique has been used to finance the construction and operation of bridges, power plants, airports, gas pipelines, railways and other pieces of critical infrastructure. The key benefit of project finance is that the project risk is spread among a consortium of participants relative to their capacity to absorb it. While the owners of the project (sponsors) risk a substantial amount of equity capital, lenders to the project (banks or bondholders) risk an even greater amount of debt capital given the highly leveraged nature of infrastructure projects. 

Project Finance - Risks and Tenors

The risks associated with project finance range from which party will pay for lost output if there are any construction delays to whether the project will generate enough cash flow to repay lenders. Other types of risks include supplier delays, political instability and exchange rate risks if the project is borrowed in dollars and earns revenue in a local currency. In order for risks to be appropriately identified and distributed, sponsors rely on a battalion of transaction advisers such as lawyers, investment bankers, accountants and consultants to ensure a project is ‘bankable’ to lenders. These transaction advisers are responsible for creating the optimal legal and financial structure that satisfies the interests of both sponsors and lenders. While sponsors are eager to operate their project with as few restrictions as possible, lenders want significant control over a project to ensure that their repayment schedule is followed. This divergence in interests may easily deter a project from completion, yet other issues are cause for even greater concern.

The key challenges for project finance in Nigeria are strongly linked to the current narrow investor base involved in financing infrastructure projects. Given that lenders to Nigerian infrastructure projects have been limited to local commercial banks, projects have been suffocated by the relatively short period of time they have to pay back bank loans (tenor). In other words, there has been a mismatch between the opportunity and ability to invest in Nigerian infrastructure. This disparity has caused most Nigerian project finance deals to have impractical financing structures that lead to either defaults or extended tenor periods. 

In emerging markets like China, capital markets, pension funds, insurance companies, development finance institutions (DFIs) and export credit agencies (ECAs) all offer lengthier loan tenors at more favourable terms. As a result, projects are more likely to cope with their payment obligations. Financing needs to be better aligned to the productive life of the asset. Projects such as pipelines and airports tend to operate for a twenty to thirty year period and it makes little sense for commercial banks to give these projects five to seven years to pay back enormous loans. Nigerian commercial banks are not designed to lend for over a seven year period given the short-term nature of their business and it is therefore essential that alternative sources of investments with larger and more patient pools of capital are incentivised to participate in infrastructure financing.

To a great extent, sophisticated investors have so far been discouraged from taking full advantage of the infrastructure opportunities available in Nigeria by a combination of poor policy decisions, weak property rights, inconsistent regulation and volatile economic activity. This has been worsened by the fact that most of Nigeria’s infrastructure assets were previously owned by the government and have been poorly managed for decades. As a result, a long lasting stench of dysfunction has plagued many infrastructure assets that make them unattractive prospects for investors. This hindrance has not only restricted Nigeria’s ability to reach full economic capacity, but it has also made it difficult for businesses to deal with the hefty costs associated with bad infrastructure (i.e. high electricity, diesel, petrol and transport expenses). Nonetheless, project finance in Nigeria is still very much in its infancy and despite pressing challenges, positive trends are beginning to emerge. 

The Promise of Project Finance

Since the privatisation of NITEL (Nigerian Telecommunications Ltd) in 2005, project finance has been used to capture the economic opportunities associated with industrialisation and infrastructure development. The telecoms privatisation process saw the rapid emergence of an array of telecommunication companies (i.e. MTN, Glo and Etisalat) using project finance as a means of expanding their transmission towers to handle growing demand. By the power privatisation process in 2011, bidders for power assets increasingly relied on project finance to finance the acquisition of power generators and distributors. In 2014, the ₦220 billion ($1.1 billion) intervention fund by the Central Bank of Nigeria settled all outstanding debts in the power sector and ensured all market participants (power generators, distributors etc.) could honour their financial obligations. This landmark project finance transaction should prevent any further liquidity problems in the power sector and enable market participants to become more revenue efficient as they seek to meet their loan repayments. Looking forward, it is expected that project finance will further the Federal Government’s ability to promote its diversification agenda as we are already starting to see billion dollar project finance deals in the agriculture, cement and manufacturing sectors.

All in all, there is no doubt that Nigeria still has a long way to go, but Rome was not built in a day and the progress made so far has provided a strong foundation. As policy makers cultivate a more conducive business environment in Nigeria, this will galvanise more domestic and foreign investors to participate in Nigerian infrastructure financing. Both international banks and DFIs are starting to pay more attention to certain project finance transactions and this has provided these deals with a more robust marketing profile. With elections looming, one only hopes that Nigerians elect leaders who will prioritise infrastructure as it will create jobs, improve living standards, and accelerate economic growth. The infrastructure deficit will be recorded in Nigeria’s history as one of its most urgent concerns and her ability to deal with this challenge will no doubt define her future economic trajectory. Project finance offers a viable solution to this issue and will enable Nigeria to take its rightful place in history as the ‘Giant of Africa’.

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