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
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
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
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
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
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.
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
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.
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
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
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.
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
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
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.