More appetite for emerging markets

Author: | Published: 1 Jul 2008
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The data on project financing in Nigeria shows that most projects are oil and gas-related (LNG) and exploration/production (E&P) in the vast majority of cases. More recently with the price of oil spiraling upwards, marginal fields joined this elite group, albeit mostly in co-financing arrangements rather than non-recourse lending.

However a recent trend (in the past five years) has seen the Nigerian market for project finance grow in its appetite for risk, with an expansion in its scope beyond the typical LNG and energy-related financing. The landscape has seen some major landmarks and firsts. Standing tall among them are two major public-private partnerships (PPPs): a new Lagos domestic airport – Murtala Muhammed Airport 2 – and a major road concession in Lagos – Lekki Expressway.

From the seat of government, the administration of President Yaradua has a seven-point agenda, which includes addressing Nigeria's infrastructure deficit currently said to be in the region of over $1 trillion. The federal government admits that the purse for this task is lean compared with the needs at hand. The federal and state governments have openly accepted that they need to find creative models for financing infrastructure and that they are open to PPPs, loans, private equity, joint ventures and more.

Nigeria's financial ratios and good progress with political/economic reforms has earned it a BB-rating for two consecutive years. It should be noted that only four out of the 16 countries rated in Africa have a BB or more.

On the international scene, the economic depression in several countries has made private equity investors (and their financiers) shift their focus to emerging markets like Nigeria. These forces have invariably led to a healthy appetite for made-in-Nigeria projects. They bring us to the next question: how is the macro environment prepared for the challenges ahead?

Setting a framework

The key question many will ask is whether there is a legislative framework for the expected capital inflow for infrastructural development, particularly regarding PPPs.

The year 2005 saw the emergence of the Infrastructure Concession Regulatory Commission Act (ICRCA), while the Public Procurement Act (PPA) was enacted in 2007. The Fiscal Responsibility Bill was also passed into law recently.

The ICRCA set up an Infrastructure Concession Regulatory Commission charged with the responsibility for regulating all concessions by the federal government and its agencies. A former head of state, chief Ernest Shonekan, has recently (June 2008) been appointed by the President to chair this Commission. It is important to note that the ICRCA has defined "concessions" widely to cover any type of PPP, and is therefore expected to be the regulator for all federal government PPPs.

Monitoring government spending

The Public Procurement Act 2007 should set the tone for transparency in federal government bids. One problem that the Public Procurement Act addresses is the general impression of international contractors and investors that federal government bids have predetermined winners and the processes are far from transparent. A second issue is the need to instil discipline in civil servants and an understanding of competitive bidding as a means of achieving value for money (VFM).

As a follow up on the Procurement Act, the federal government recently (June 2008) set up procurement departments in every federal government ministry. Also, several states (Bayelsa and Lagos state notably) are in the process of passing their own State Public Procurement Law.

The Fiscal Responsibility Act, when implemented, should strengthen fiscal policy design and implementation, change perspectives to long-term planning and sustainability, and improve the budgetary process. In a nutshell, citizens can task the government on budgetary lapses with legal legitimacy. Countries like Mexico and Ecuador have passed similar bills to reduce ineptitude in government spending.


Nigerian banks were coerced by the Central Bank in 2005 to merge into bigger entities, with a minimum capital base of N25 billion ($2.1 million). Today instead of over 80 banks Nigeria has 25 stronger banks with diversity in ownership structure and greater capacity to disburse higher value loans for longer tenures.

Nigerian banks, unlike in the early 2000s and before, now take a keen interest in long-term lending for infrastructure projects. Most importantly they are beginning to appreciate project financing for what it really is – that is, lending against the projected cash flow. Several banks have used their new-found fillip to structure useful on-lending facilities with international financial institutions, AIG for example.

Nigerian banks have stepped up their game not just with offices in other countries but by accessing international capital markets. The $350 million Eurobond issuance by Guaranty Trust Bank Plc is a good example, and there are others.

The stock market in Nigeria has taken great leaps, with more companies going plc in the past five years than in the 10 years before. In February 2008 the capital market capitalisation of listed companies in Nigeria was valued at $97.75 million. A deepened capital market will invariably fund infrastructure projects in the near future.

The Nigerian government has in the last eight years issued bonds worth N513 billion ($4.3 billion). This confidence in our economy and in the government has given several states (Lagos and Delta notably) the impetus to launch their own infrastructure bonds.

As the pieces of the puzzle seem to be coming together one should be asking the next pertinent question: Which sectors would attract project finance in the near future? How?


Most telecommunication companies in Nigeria started out with a mix of equity and debt. MTN Nigeria, for example, purchased monies from banks, the Netherlands Development Finance Company (FMO), the German Investment and Development Company (DEG) and IFC. In 2007/2008 MTN completed a very successful private placement, which will convert most of its loans to equity.

The next port of call is expected to be the capital market. Most telecommunications companies in Nigeria are expected to fund their projects either from a private equity injection (like Etisalat/Mubadala – two companies that had a strategic partnership in Abu Dhabi, which recently injected funds to roll out on their newly acquired licence) or from the capital market, over the next few years.


The major international airports and domestic airports in Nigeria are likely to be thrown open to concessionaires within the life of the current administration. Concessionaires will be seeking all forms of structured finance.


The major railway lines and extensions need to be rehabilitated and several new lines need to be constructed. A statement in this regard is expected to be made by the government shortly. The financing structures are likely to include a mix of loans and PPPs.


The real-estate sector and construction is at an all-time high despite the increasing cost of steel and cement. Several states (notably Rivers state) have resorted to PPPs to meet their housing needs, and real-estate investors and private investors are exhibiting bravado in their schemes. Notable among the recent developments is the Palms Shopping Mall in Lagos, co-financed by Actis.

Real-estate joint venture schemes are catching on very fast and the Securities and Exchange Commission (SEC) is preparing for the take off of real estate investment trusts (Reits). The mortgage industry is barely existent and is stifled by high interest rates ranging between 17% and 21% a year. A secondary market for mortgages is not even on the cards, with the primary market still creeping along slowly.

Hotels and tourism

Hotel projects have been on the increase with the presence of Protea, Intercontinental and Radisson, to mention a few, in Lagos and several other cities. The next few years will invariably see more project finance directed at hotels in particular and tourism generally.


The Federal Road Maintenance Agency (FERMA) has recently advertised 10 Federal Trunk A roads for maintenance concession and tolling. This transaction – which is the first of its kind in Nigeria – has attracted over 100 expressions of interest (EOI) and should be a major source of domestic and offshore financing when the process is completed. The second Niger Bridge project is still being negotiated. Several states (notably Lagos and Rivers) are also exploring road concessions for roads in their states.

Power projects

One of the first things the current administration did at its inception a year ago was to declare a state of emergency in the power sector. Nigeria's inefficient power supply is due mainly to the disparity between energy generation and demand. The federal government has recently (June 2008) approved the release of N900 billion (about $7.6 billion) as the first instalment of funding geared to fix Nigeria's power.

The federal government plans that at the end of three years, when generation has improved considerably, the generation and distribution aspects will be handed over to the private sector while the transmission will be handled by a state utility company.

In the meantime, the Nigerian Electricity Regulatory Commission (NERC) has done much to establish itself as a regulator for the sector since its inception in 2005. Several major independent power projects (IPPs) are taking place and others have been licensed by NERC. IPPs are the next big thing in power, and these projects will be financed over the next 12 to 36 months.

Future funding

The project finance market is already showing signs of who the key actors will be. Private equity funds will definitely play a major role with more joint ventures and co-financing schemes occurring, both domestic and cross-border.

Domestic banks are poised to partner with their international counterparts on all fronts: on-lending arrangements, syndications, local guarantees and more. Domestic banks are also working out all types of creative structures for having a piece of the growing project finance pie. Some Nigerian banks have set up subsidiary companies that allow them participate in the special purpose vehicles for some of these projects. Many banks now have infrastructure desks mandated to fish out these opportunities.

Development finance institutions (DFIs) are already playing a major role in this market and will continue to do so. Actis and Renaissance Capital, for example, already have a strong local presence with heavy activity.

State governments are becoming even more active in using PPPs and bonds to forward their programmes – Lagos state is at the forefront with transactional experience on the Lekki Road Concession and the enacting of the Lagos State Highways, Roads and Bridges Law as a legal framework.

Pension funds in Nigeria are worth N815 billion ($6.8 billion) as of December 31 2007. Pension fund managers will be therefore be seeking to plug into projects that the Pensions Act permits them to invest in.

The high influx of Chinese investors into Nigeria is also noteworthy, as they will want their share of the action. The Chinese government is likely to propose Chinese-Exim bank loans to government(s) in exchange for projects for Chinese companies. The Chinese government used a similar structure to secure the railway modernisation project between Lagos and Kano under the last administration. China has used this structure in DCR Congo and elsewhere.

The World Bank will continue to play a key role, particularly through its International Development Agency (IDA), which currently has in excess of $2.6 billion of commitments in Nigeria. 41% of this is for infrastructure.

An interesting future

The market for project finance in Nigeria will grow, with PPPs and private equity being the buzzwords. Infrastructure bonds will become more popular and the federal government will put one in place in the next 12 to 24 months.

The market for concessionaires in public utility (transportation and power in particular) will be unprecedented. These pilot projects (when successful) will boost investor confidence in Nigeria.

Nigeria will attract more offshore lending and more multi-lateral agencies will be engaged as the investment climate further improves. Many state governments will establish their own PPP laws and departments and will try hard to attract partners.

Local banks have gathered traction. These banks are actively in search of avenues for borrowing and on-lending to Nigeria in single-digit figures. When this comes on stream at Libor plus a few notches, it will bring great value to Nigeria's infrastructure advances.

Nigeria's income from oil is largely denominated in dollars. Therefore Nigeria's spending capacity and the financial muscle of its equity participants will be influenced by the strength of the dollar

The Niger Delta crisis is a key determinant factor. If the situation in the Niger Delta improves then we are bound to see more of the traditional oil and gas deals and more deals generally. However, if it deteriorates or remains as bad as it is, then a lot of the available financing will seek competing projects – mainly in infrastructure.

The Corruption Index should improve even further as Nigeria continues with its anti-corruption and anti-money laundering efforts. This should place Nigeria in an even better position to attract funding for projects.

The synergy between project finance and Nigeria's infrastructure needs will play a major role over the next few years in increasing Nigeria's gross domestic product (GDP) and its macroeconomic ratios, particularly the figures on foreign direct investment (FDI). It will be interesting to see how this all plays out.

Author biographies

Ayuli Jemide


Ayuli Jemide is a graduate of the University of Benin (LLB), the Nigerian Law School (BL), Northwestern University, Chicago (LLM) and Instituto De Empresa, Madrid, Spain (postgraduate certificate in business administration). He is also a member of the Chartered Institute of Arbitrators, UK.

Jemide's specialties include infrastructure, project finance, public-private partnerships (PPPs) and real estate. Jemide is also a prolific writer and regular speaker. He has for the past two years written a column "LAWBIZ" in This Day newspaper, which discusses legal issues relating to the Nigerian business world. Jemide finds simple solutions to legal complexities.

Dolapo Kukoyi


Dolapo Kukoyi is a graduate of the University of Ibadan (LLB) and the Nigerian Law School (BL). She also holds a Diploma in international intellectual property. Her specialties include business organisations, intellectual property and corporate commercial law. Kukoyi guides foreign corporations wishing to establish subsidiaries in Nigeria through the legal and regulatory hurdles. She speaks English, Yoruba and Hausa fluently. Her chief skills are her people and communication skills.

Ndubuisi Ugochuchukwu Greg


Ugo is a graduate of the University of Ibadan (LLB with first class honours) and the Nigerian Law School (BL). His specialties include corporate commercial law. Ugo has invaluable research skills and leads the scripting of Detail's monthly e-newsletter. He speaks English and Igbo fluently.