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Infrastructure is the bedrock of all developments in a country. However, infrastructure in Nigeria is in a sorry state which, over the years, has hindered the growth of the economy. One of the reasons for inadequate infrastructure is lack of finance. In this report, Chinenye Anuforo examines how the capital market can be used to finance the nation’s infrastructure need. Infrastructure is the backbone of any economy as no economy can grow and develop without a reasonable stock of critical infrastructure in transportation (roads, rail, ports and airports), energy, water, sanitation and communication. Where infrastructure is inadequate or ineffective, growth is affected and people’s standard of living is negatively impacted. The World Bank estimates that a 1 per cent increase in a country’s infrastructure stock leads to a 1 per cent increase in the level of GDP. Clearly, the multiplier effect of infrastructure stock will be higher in countries that are starting from a low base. This has been demonstrated by the transformation of the telecommunication sector in Africa. A study of 42 low and middle income countries revealed that the effectiveness of public infrastructure can partially explain differences in growth rates across countries. The World Economic Forum (WEF) ranks Nigeria 130th out of 144 countries on infrastructure in its 2013 global competitiveness index report. While this ranking underscores the level of the challenges facing Nigeria, it should strengthen government’s determination to tackle the problem within the shortest possible time so as to improve Nigeria’s competitiveness. The WEF 2012 report notes that investment in infrastructure boosts a country’s competitiveness while the World Bank’s Africa Infrastructure Country Diagnostics (AICD) affirms that raising Nigeria’s infrastructure investments to current levels of middle-income countries in sub-Saharan Africa could raise GDP growth by as much as four percentage points. The National Integrated Infrastructure Master Plan (NIIMP) estimates Nigeria’s infrastructure needs at $2.9 trillion over the next 30 years, beginning from 2014. The African Development Bank’s Infrastructure Action Plan (IAP) for Nigeria estimates $350 billion of investment in infrastructure for the next 10 years, implying yearly investments of $35 billion in infrastructure equivalent to 13 per cent of Nigeria’s GDP and over a third of sub-Saharan Africa’s annual infrastructure needs. Existing sources cannot cover half of this requirement. Between 2011 and 2013, the Federal Government allocated on average a third of its budget to capital expenditure but only about 35 per cent of this was for infrastructure. Using the $30 billion 2013 budget as an example implies that the Federal Government budgets can only cover 10 per cent of the annual requirement. Infrastructure projects are typically long term requiring low interest rates whereas the Nigerian banking system currently offers high rates and short tenures. While low interest rates are currently available from developed markets, Nigeria must be careful not to overly depend on foreign loans to guard against exposure to foreign exchange risk especially given that revenues from infrastructure are predominantly in local currency. Challenges posed by traditional funding sources make capital markets increasingly the preferred way to finance infrastructure in Nigeria. The primary role of the capital market is to raise long-term funds for governments, banks and corporations while providing a platform for the trading of securities. This fundraising is regulated by the performance of the stock and bond markets within the capital market. The member organizations of the capital market may issue stocks and bonds in order to raise funds. The Nigerian capital market has the capacity to provide the long-term funds needed to solve the infrastructural challenges in the country. Former Head of Interim Government, Chief Ernest Shonekan in a recent study on infrastructure delivery said: “the capital market could be used to fill in the resource gap through the issuance of some medium to long term instruments such as bonds, long-term corporate/commercial bonds, infrastructure bonds or such other instruments of longer term maturities as would provide suitable funding for infrastructure projects. “For instance, Development Finance Institutions (DFI) such as the Bank of Industry could issue bonds on behalf of Federal Government of Nigeria (FGN) and directly on-lend to banks to finance projects. The federal government takes credit risk while banks bear the project risks and bondholders do not take any credit or project risks”, he added. According to him, “DFIs could issue bond with the federal government or Central Bank of Nigeria (CBN) guarantee and lend directly to project executors. Here, the Federal Government or CBN takes credit risk and DFIs bear project/performance risk. Another variant would be where a consortium of banks issue bond with CBN guarantee and lend directly to project executors, with the FGN or CBN bearing the credit risk, while the consortium of banks bear project/performance risks.” Relating the experiences of some developed countries, the Chairman of Europe Bond Commission, Mr. Chris Golden in a conference recently organized by the Chartered Institute of Stockbrokers (CIS) said that in the United States, for example, local municipalities were responsible for and take charge of their local housing, schools, sewage works, water supply and roads. According to him, they fund these projects through the US Municipal Bond Market where the bondholders, the investors are guaranteed their returns by the cash flow from local taxes. These municipalities see their financing subsidised by the fact that the interest on municipal bonds is exempted from federal taxes. Thus, the central government gives a direct incentive to private investors to help finance projects in towns that may be thousands of miles away from the investor’s home. However, those who benefit from the project are taking direct responsibility for the project and its financing; meaning that they decide on the project, appoint the relevant architects or engineers or construction company, allocate a budget for the project and then decide how to finance it. In addition, since the project is taking place in or around their town, the citizens can ascertain whether the project is properly completed”, Golden said. According to him, there is an advantage in managing local infrastructure in this way, it allows local people to be directly involved in guiding their own destiny. “It also allows them to judge directly whether the implementation of the project is taking place as they expected, as it was described to them by their local leaders, and they can hold those local leaders accountable”, Golden said. The Securities and Exchange Commission (SEC) recently approved Nigeria’s first infrastructure fund, the Nigerian Infrastructure Investment Fund worth about $100 million. According to the commission, “we expect this product to be a major attraction for our $20 billion pension fund industry. Examples from Canada and Australia demonstrate how successfully pension funds can be used to finance infrastructure while generating appreciable returns. Although current Nigerian Pension Commission guidelines allow pension funds to invest up to 20 per cent of their portfolios in infrastructure bonds, the Nigerian Pension Fund Administrators (PFAs) currently allocate only 1 per cent of their portfolios to infrastructure while Australian and Canadian PFAs allocate 5 per cent on average. Canadian pension funds have invested over $100 billion in infrastructure and real estate, compared to about $1 billion currently invested by Nigerian Pension Funds, (implying they invest a hundred times more in infrastructure). Securitization, the commission added, offers potential new capital to finance critical infrastructure and other project finance needs, it reduces funding costs, reduces asset-liability mismatch and enables efficient transfer of risks. Director, Securities & Investment Services Department of SEC, Ms. Mary Uduk, said infrastructure deficit of the country could only be solved through the bond market. According to her, the capital market offers long-term vehicle, which could be accessed through equities bonds or mortgage bond securities. She noted that the government could not finance infrastructure deficit through revenue allocation only. Uduk said the commission would ensure regular review of its investment guidelines and disclosure requirement for easy access to bonds in the country. The SEC director noted that both the federal and state governments have tasted the potential of the market, disclosing that the sum of N589 billion was raised from the nation’s bourse through bonds by various states for infrastructure development between 1999 and 2013. She pointed out that Lagos State government has been the most active state in bond raising as it accessed the bond market four times between 1999 and 2013. According to her, Lagos State government was in the process of getting approval for the fifth bond, which would soon hit the market. “The state government internal generated revenue cannot be enough to finance its long-term infrastructural projects and the bond market has really assisted in fast-tracking the provision of infrastructural facilities in the state,” she said.
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