New Telegraph

December 8, 2023

Restructuring capital market for infrastructure devt

The capital market needs to be positioned to play more significant role in infrastructure development. CHRIS UGWU writes

The world over, infrastructure contributes to economic development by increasing productivity and providing amenities, which enhance the quality of life. The services generated as a result of adequate infrastructure base translate to an increase in aggregate output.

Although the Nigerian capital market had suffered monumental losses due to sustainable decline in stock prices, the ravaging COVID-19 and the recent #ENDSARS, also compounded the situation through destruction of key infrastructures in some parts of the country. The country’s huge infrastructural deficit in power, housing, roads, healthcare, and port services among others has contributed to a large extent in retarding the overall growth and development of the sector which is center for capital formation. Nigeria has, however, remained significantly underdeveloped in terms of basic infrastructure , thereby faces very high income inequality. According to experts, Nigeria needs about $15 billion annually over the next five to six years to finance its infrastructural deficits.

To this end, reliance on government revenue like taxes and grants are never sufficient to fund these infrastructural developments. Increase in taxes is a disincentive, which places more burdens on the citizens. Therefore, rather than relying strictly on internally generated revenue, governments could float bonds at intervals for specific developmental projects. All tiers of government, their agencies and corporate organisations have the opportunities to finance their infrastructural projects through the issuance of bond instruments. Different shades of bonds can be structured to suit the project peculiarities, investor’s expectations, concerns and issuers requirements. Thus, there is Federal Government (sovereign) Bonds, Government Agency Bonds, State/Local Government (sub national) Bonds and Corporate Bonds.

Worried by the spate of infrastructure deficit in Nigeria, economic stakeholders, last week, urged regulators to restructure the capital markets to foster private partnerships to contribute towards the country’s infrastructure development through funds mobilisation.

$15bn needed annually for infrastructural

Mr.Adekunle Oyinloye, Managing Director, Sifax Shipping Company Limited, and a former CEO, The Infrastructure Bank Plc had said Nigeria needed $15 billion annually over the next five to six years to finance its infrastructural deficit. Oyinloye, who stated this last week in a paper he presented at the 24th Annual Conference of the Chartered Institute of Stockbrokers tagged: ‘Infrastructure and Deficit Funding Bridging the Gap via the Nigerian capital market, said Nigeria’s infrastructure sector was grossly underdeveloped, and this has limited access to social services and significantly increased cost of production and trade. He noted that at present, the value of Nigeria’s infrastructure was about 35 per cent of Gross Domestic Product (GDP), very low in comparison with 70 per cent for economies of same size, and public infrastructure expenditure as a percentage of GDP is at 3.5 per cent. “Infrastructure financing cannot be met through public resources alone as it will be crippling to the economy in the era of fiscal constraints. With the estimate that the country needs to fund about 18 per cent of its GDP on infrastructural development, it is important to start to look for alternative sources of financing to bridge the deficit. “This financing is expected to come from local project sponsors, international project sponsors, local banks, international banks, local institutional Investors, international Institutional Investors and multilateral finance organizations,” he said.

Call for market repositioning

Oyinloye noted that the market should be positioned to play a more significant role in infrastructure development with far reaching reforms in the financial sector, adding that bond issuance encouraged and foster good regulatory environment to protect investors. “Government cannot be the sole provider of infrastructure projects. The regulators should restructure the capital markets to foster private partnerships to contribute towards the country’s development through funds mobilisation. “As most of infrastructure projects will have cash flows projected in local currency, the risk of fluctuation of the exchange rate impairing the ability to meet FX debt service rate should be mitigated. The monetary authorities should put in place proper coverage to isolate currency risk from operational risks. “The traditional products have proven incapable of deepening the market let alone, increasing its size. Operators must now put on their thinking caps to evolve products that fully tap into the huge opportunities offer by Infrastructure funding gaps,” Oyinloye said. He said that Nigerian capital market authorities were making quiet progress in their efforts to build the market’s infrastructure and the regument infralatory framework that supports a well-functioning financial system. “Institutional investors are increasingly realizing advantages of infrastructure investments to balance and diversify their portfolios, it is imperative for all players in the Nigerian market both public and private to work together towards a stable economic environment and safe and productive playing field for FDIs and FPIs. “The development of Nigeria’s capital market will hardly follow a linear path, and therefore sequencing of policies aimed at reform and productivity is consequential as well as regulatory reforms. “The strategic imperative is to develop frameworks that fit Nigeria’s circumstances; I dare say a deliberate recalibration of exiting Pension Fund may unlock the full potentials of our earlier Reforms,” he noted.

Stakeholders favour more funds

Some stakeholders in the Nigerian economy stressed the need for more funds for infrastructural development in the country. The stakeholders made the call recently at the Lafarge Africa Plc inaugural session of Concrete Ideas webinar series with the theme: ‘Public-Private Partnership Approaches to Rapidly Up-scaling Nigeria’s Economic Infrastructure.’ They said injection of more funds became necessary in order to achieve the right level of development. The webinar is a quarterly platform that will assemble both national and international stakeholders to discuss strategic and topical issues in the area of construction and other sections of its value chain. Mr. Mobolaji Balogun, Chief Executive Officer of Chapel Hill Denham, said to achieve the right level of infrastructural development Nigeria needed to increasing infrastructural spend in the Nation’s budget by 20 per cent per year. “We have to be increasing our infrastructural spend probably by 20 per cent per year. This will enable us achieve the right level of development. All the solutions to Nigerian infrastructure problems are available in our financial markets. We should emulate other countries on how to tap more opportunities from the capital market,” he said. Mr. Bismarck Rewane, Chief Executive Officer, Financial Derivatives Company Limited, who decried the sorry state of infrastructural develop ment in the country, noted that about 60 per cent of the nation’s grounded infrastructures are uncompleted projects. Rewane noted that Epe-Lekki express way, which was started some years ago, still remained uncompleted despite toll fess being collected. Minister of Works and Housing, Babatunde Raji Fashola, who commended Lafarge for the initiative, which, he said was very timely, noted that Nigeria had infrastructure gap because funding was halted. “It was in the early 70s that infrastructures received massive funding across the nation. We must go back to those days. The present administration is trying to revive the system. “Encouraging public-private partnership is partly government’s plan to help accelerate infrastructure development. Despite government all over the world trying to save the private sector following COVID-19, PPPs are still viable and going concerns in Nigeria. We are using tax credit scheme in most of our construction work. This is an opportunity to manage 2000km federal roads. “It also offered government opportunity to complete existing roads and build new ones,” he said.

SEC targets infrastructure project bond

SEC recently said that it expects that the Federal Government should consider issuing the infrastructure project bond. A former Acting Director General of the SEC, Ms. Mary Uduk, while speaking on what the Federal Government should prioritise in 2020 and 2021 to strengthen capital markets in Nigeria, said infrastructure project bond was very important not just for the capital market, but for the country and for country’s infrastructure issues. “If they do that, it would help a lot in financing some of our infrastructure issues. We also expect that the Federal Government would privatise some of the state owned companies or enterprises by selling them through and listing them through the capital market. This will unlock capital into financing the existing infrastructure deficit and unlock capital into the capital market,” she said. “There is another sort of way that the Federal Government has leveraged the capital market through infrastructure project bonds. We believe that this is one aspect of financing that the federal government has never done. We believe that if the federal government would do that it would help to securitise it and the proceeds from the executed projects would be used to pay both the principal and interest of this fund. “And if it is securitised it would unlock capital for the market and the private sector would be able to invest here and government would harness private capital to fund infrastructure. This would really help because it would give confidence to institutional investors as well as foreign investors. It would also help to grow the capital market. We believe that the federal government would do this and even other state governments would follow suit. But even as we speak, state governments have also leveraged the market to issue bonds for dedicated infrastructure financing,” she noted.

Last line

There is no gainsaying that capital market is a critical pillar to long term fund mobilisation needed for capital formation to fast track economic growth and development.

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