Funding Nigerian Infrastructure Deficit- Unleashing Domestic Private Sources

Funding Nigerian Infrastructure Deficit–

Unleashing Domestic Private Sources

Deji Olatoye, LL.B (Lagos), BL (Abuja), MCL (Cantab)

Relevance of Infrastructure Development to Achievement of the SDGs

�  “Infrastructure is an input to a wide range of industries and, as such, an important driver of long-term growth.” (Bank of International Settlement Working Papers No. 454, p.1).

�  Therefore, infrastructure is crucial to the achievement

of all 17 Sustainable Development Goals (SDGs), whether directly or indirectly

©The Lodt Law Offices, Lagos, Nigeria

Relevance of Infrastructure Development to Achievement of the SDGs


Infrastructure,

Industrialisation &

Innovation

Reducing Global

Inequality

Inclusive, Sustainable

Human habitat

Sustainable

Consumption &

Production

Combating Climate Change

Aquatic Biodiversi

ty

Terrestrial Biodiversi

ty

Social Justice

and Inclusive

Development

Global Partnershi

p for Implementation of Goals

Poverty Eradication

Food Security

Health & Wellbeing

Inclusive & Quality

Education

Gender Equality and

Women Empowerm

ent

Water & Sanitation

Access to Sustainable

Energy

Inclusive Economic

Growth

Direct Infrastructure Implication

Indirect Infrastructure Impact

Nigeria’s Infrastructure Deficit


Nigeria Brazil India BRICS Average (minus Russia)

Global Average

South Africa

25 53 58 68.5 70 87

Infrastructure Stock as a Percentage of GDP

Source: MGI’s ‘Infrastructure productivity: How to save $1 trillion a year’, Jan 2013

Nigeria’s Infrastructure Deficit


Amount Required to Maintain Current Global Infrastructure Stock Vs. Required to Get Nigeria to Current Global Average

Global Nigeria

3,400 10

57,000

186

Next 18years (US$ '000,000,000) Annual (US$ '000,000,000)

Source: Global figures from MGI’s ‘Infrastructure productivity: How to save $1 trillion a year’, Jan 2013; Nigerian extrapolated from the 30-year figures in the National Integrated Infrastructure Master Plan (NIIMP)

Current Policy Responses


Initiatives Content

Study African Development Bank (AfDB) ‘The Infrastructure Action Plan for Nigeria: Closing the Infrastructure Gap and Accelerating Economic Transformation Report‘ (Commissioned by the Government of Nigeria).

•  Detailed assessment state of infrastructure

•  Achievable goals for infrastructure by 2020

•  Action plan for achieving objectives. •  Financing options including private

sector opportunities

Policies National Integrated Infrastructure Master Plan •  A 30-year plan identifying needs, setting areas of priority, assessing financing requirements and setting out sources and basis of funding.

Legal/Institutional Framework

•  Infrastructure Bank •  Infrastructure Concession Regulatory

Commission •  Nigerian Mortgage Refinance Company •  Nigerian Sovereign Investment Authority

‘Infrastructure Fund’ •  Capital Market rules on ‘Infrastructure Fund’

and ‘Asset-backed Securities’

•  Laws, regulations and institutions providing technical and financing support for private sector involvement in various aspects of infrastructure financing

Recent/Current Policy responses to the challenges of financing the Deficit:

How will we fund the US$10 billion annual requirement?


Why domestic private/commercial sources remain the SWEET SPOT

.

Foreign

Public: - Traditional donor countries have pledged only 0.7% of their GDP in support of development - Developed countries equally have qualitative infrastructure deficit due to pressure to convert to climate-compliant infrastructure - Nigeria’s access to ODA funding has reduced by ....% over the last 10years, about 90% of which goes to health and population support International Private: - The traditional source of international project finance – banks – is constricted by recent banking crises and consequence BASEL III risk regulations - New sources in Capital Market and Institutional Funding are at rudimentary phase of development. - Overall global competition for international finance is high due to quantitative and qualitative deficit of developing and developed countries respectively

Domestic

Public - Government is committed to increasing percentage for ‘Capital Expenditure’. Nonetheless, falling oil prices adversely affect traditional government procurement

Private - Growing Capital Market and rebound of domestic source of market deal flow - Growing, though shallow, insurance market - Establishment of Nigeria’s SWF - 10-years old pension reforms increasing savings available for institutional - Capital market rules on ‘Infrastructure’ and ‘Asset-backed’ instruments



Size (US$

‘000,000,000)

Significant Items of Portfolio

Growth over previous year (%)

Capital Market (2014 market capitalisation)

91 Federal Government Bond- 30%

-11.5

Pension Fund (2014 total invested asset)

25 Federal Government Bond- 50%

13 (from previous year)

Insurance (2014 gross total premium)

1.7 Stock of Bond- Circa 70% Real Estate & Mortgage-

13% (2010-2011 Naicom figures)

25% (annual growth since 2008)

Nigerian Sovereign Investment Authority

1 Infrastructure-specific fund- 40%

N/A

Sources: Capital market figures from Nigerian Stock Exchange Q4 2014 Fact Sheet; Pension figures from National Pension Commission (Pencom) December 2013 and 2014 Monthly Reports; Insurance figures from National Insurance Commission (Naicom); SWF figures from NSIA.





NSE Market Capitalisaation

FG Bonds

Pension-Insurance-SWF Assets

Annual Infrastructure Requirement

91

33.3

27.7

10

US$ '000,000,000



Current Initiatives & Challenges Suggested Action

Sovereign Wealth Fund (NSIA)

•  Infrastructure Fund is one of the 3 strategic funds under management (40% of AUM).

•  Unfortunately, NSIA’s only source of fund is hydrocarbon revenue, adversely affected by falling oil prices.

•  Amend NSIA Act to tap into non-oil natural resources (Solid Minerals) and boost NSIA sources of investible funds (organs concerned include National Assembly; NSIA; Ministry of Solid Minerals).

•  Leverage portions of 40% Infrastructure Fund to crowd in other private investments through the capital market

Insurance •  Insurance market still shallow. •  Insurance, like other investor

sectors, still shy of infrastructure funding.

•  Stimulate shallow Insurance market. •  Incentivize insurance investment in

infrastructure projects

Why current initiatives aimed at directing the significant domestic private finance towards Infrastructure is not working and what to do about it.



Current Initiatives & Challenges Suggested Action

Capital Market

•  Securities & Exchange Commission rules on ‘Infrastructure Funds’ and ‘Asset-backed securities’.

•  Permit listing of Funds (project/infrastructure bond), and private funds.

•  Ironically, investors have not taken substantial advantage of the rules

•  Leverage dominance of Government Securities in Capital Market (30%) and Pension Funds (50%) to crowd in private funds targeted at infrastructure.

•  Strengthen the roles of Infrastructure Bank and Nigerian Mortgage Refinance Company for a similar purpose.

Current Institutional Investment Sector Initiatives

? ©The Lodt Law Offices, Lagos, Nigeria


The author, Deji Olatoye, is a Partner at The Lodt Law Offices, Lagos, Nigeria. He was a member of the Legal Implementation Committee of the Financial System Strategy (FSS) 2020 of Central Bank of Nigeria, wherein he served on the Credit & Mortgage as well as Financial Market sub-committees. He is on the Integrated Business Reporting Committee of International Corporate Governance Network (ICGN), UK and served on the work group that produced ICGN’s Integrated Business Reporting Guidelines, 2015. Deji holds a Master of Corporate Law of University of Cambridge This presentation is a digital artifact for World Bank’s Financing for Development programme.

Thank you


Economy & Finance

Funding Nigerian Infrastructure Deficit- Unleashing Domestic Private Sources