Nigeria's economy might have been hit by the ongoing adjustment to lower oil revenues, tumbling share prices and the naira's falling exchange rate, but among Lagos bankers and other industry players confidence remains that the government will maintain its drive to mobilise infrastructure finance via the public-private partnership (PPP) templates that have been so widely used in the UK and South Africa. That this money becomes available is critical, as Nigeria's overall growth continues to be constrained by poor infrastructure.
According to former finance minister Shamsudeen Usman, Nigeria needs $40bn to $60bn to fund major infrastructure, including dilapidated road and railway networks, and, above all, an estimated power supply deficit of at least 7000 megawatts (MW), with less than half of the population and only a fifth of rural households having access to electricity.
"Although much of the steam has – albeit temporarily – disappeared from the financial sector globally, Nigeria's need for project finance is still there," says Mary Boakye, head of Denton Wilde Sapte's Africa capital markets practice.
Growing pipeline
Given the country's increasing investment requirements, particularly within the infrastructure sector, Nigeria's pipeline for project finance is growing at "an accelerated pace", says Patrick Mgbenwelu, head of project finance at Stanbic IBTC Bank.
Against the background of tumbling oil prices – which have thrown into doubt Abuja's reference price of $45 per barrel of crude oil for its 2009 fiscal year, and cut into the 49% of budgeted expenditure dedicated to project development and infrastructure – the requirement for PPPs to fill this gap is greater than ever.
"The Nigerian government has accorded the PPPs a very high priority, and now needs to turn to project finance to bridge the funding costs, and to provide some significant commitment getting these deals off the ground," says Mr Mgbenwelu. "From the discussions and project memos that sponsors and borrowers are sharing with us, we can see that once the market normalises, and the taps open up for dollars, we'll see a flood of deals being done."
Although lenders have become extremely selective in the current climate, says Mr Mgbenwelu: "International banks and investors are eyeing Nigeria very closely, as the government continues taking positive strides on transparency, due process and tackling corruption issues across all sectors."
Demonstrating what can be done, Nigeria provided one of last year's African infrastructure financing highlights. In October, a long-term, four-tranche $291m PPP financing was closed for a $400m project to widen, rehabilitate and toll the existing Lekki to Epe artery road linking Victoria Island with the Lekki peninsula in Lagos. The scheme marks Africa's first toll road outside South Africa, and attracted "ground-breaking finance", according to Mr Mgbenwelu. "It was Nigeria's first PPP road deal, and the 15-year tenor was the longest ever in Nigeria. The lenders were able to get much comfort from the Lagos State government's commitment towards the project and the bank-friendly payment mechanism underpinning the revenues provided from the tolls," he says.
Tranches of financing were committed by the African Development Bank, Standard Bank (the joint advisor and arranger of the international commercial tranche) and a syndicate of five local banks. In addition, the Lagos State government provided a $43m mezzanine financing in a deal "that will certainly be used as a template for other PPP transactions in the country", according to Mr Mgbenwelu.
Ahead of the game
Lagos State again proved itself to be ahead of the game in January, by successfully issuing the first N50bn ($335m) tranche of its proposed N250bn infrastructure bond programme, which was sucked in by investors to the tune of an 18.9% over-subscription. "If Lagos can grow in this way, the country will boom," predicts Akinsowon Dawodu, country treasurer, fixed income and commodities at Citi, which will act as a primary dealer for the five-year bond.
"People are very bullish on Lagos State, and perceive the governance as being better than elsewhere."
As market observers weigh up the potential for further Nigerian project finance, there are many who highlight that the majority of Nigerian banks appear to have pulled back from medium to long-term funding in response to a recent liquidity shortage tied to a shrinkage in capitalisation and growth in non-performing loans.
"We are not looking at anything in Nigeria, be it debt or equity, that involves the local banks. If anything, we are seeing corporates and other parties looking offshore for finance," says a London-based lawyer specialising in African finance.
"Credit committees are also being very cautious on naira-denominated debt, which in the current climate is now much more expensive to borrow than dollars," says Mr Mgbenwelu. "Although the liquidity pool for dollar funding has also almost dried up and some banks cost of funding for dollars has increased, we are still seeing borrowers trying to raise dollars, notwithstanding the higher premium."
Other developments
Local bank diffidence over longer-term financing has once again flagged up the key role that development finance institutions (DFIs) play in African project finance. "We're looking at several Nigerian projects – in areas such as power, and gas gathering and processing – all of which are still at least six months away from financing close," says Orli Arav, a director at Frontier Markets Fund Managers, which advises the Emerging Africa Infrastructure Fund.
One of these, the proposed 188MW Geometric Power scheme in Aba State, reached 80% completion at the end of January, mainly using bridge finance from Standard Bank and Diamond Bank. Several issues are still to be clarified, but "we believe the project is moving in the right direction", says Ms Arav. After due diligence is complete, the target is for long-term finance to come from the Emerging Africa Infrastructure Fund (EAIF), International Finance Corporation, the Lagos-based Africa Finance Corporation and local banks.
"The other most advanced power project is Ibom Power Company's gas-fired 190MW plant in Ikot Abasi, which is now completed, but has not yet finalised gas supply arrangements after six years of negotiations. The project will bring in a major international investor as an 80% shareholder, Houston-based developer Globeleq, which is owned by Actis, a private equity investor in emerging markets. It sets up a model for captive industry groups to buy in power. However, "Globeleq has not yet closed its equity participation", says another DFI official, who stressed that the finalisation of the project requires subsidy arrangements to be put in place."
Reviving the electricity sector remains the government's biggest challenge. As junior minister of state for power Nuhu Wya has points out: "The success or failure of efforts to raise generation capacity will decide the 2011 elections."
President Umaru Musa Yar'Adua has made it a priority among his priorities, but however much money successive administrations are prepared to commit and whatever promises are made, until now the situation has remained catastrophic.
The latest in a long line of disappointments came in early February, when the Economic and Financial Crimes Commission (EFCC) arrested Nigerian Electricity Regulatory Commission (NERC) chairman Dr Ransome Owan – who had become the most internationally respected face on the local power scene – and six NERC commissioners over an alleged multi-million dollar fraud.
Investigations continue into Mr Owan, who had previously spent three decades in the US as a distinguished industry expert and regulator, and had returned to Nigeria to head NERC and efforts to reform. There was initial press speculation that the arrests might be linked to power struggles in the sector, but other sources say the EFCC is serious about the alleged corruption and is building up a case.
Assertiveness test
New power minister Dr Rilwan Lanre Babalola was promoted from the Bureau of Public Enterprises (BPE), where he was deputy director and team leader for the Power Sector Reform Programme, to become one of the youngest ministers in Mr Yar'Adua's new cabinet. Lagos analysts say that Mr Babalola, who has positioned himself as a liberal reformist, needs to show his political muscles if he is to assert himself over the many vested interests that have conspired to undermine reforms. According to one source: "If any signal was needed that the sector can expect another round of galvanic politicking it was Mr Owan's arrest."
Perpetual questions of governance are a problem that Nigerian project promoters and financiers must steal themselves to deal with, but for all the downsides, African project finance specialists also see reasons to be positive.
"New Nigerian power projects continue to be developed and we are working on several at various stages, but these are longer term prospects," concludes Jonathan Berman, principal adviser at Johannesburg-based Fieldstone Capital. There is a huge potential roster of work still to be done.
