By Eze Nwagbaraji
Nigeria’s Infrastructure Needs and the Role of Capital Markets Theoretically, it is possible to securitize anything where risk is possible.
The establishment of the Chicago Board of Trade in 1848, for example, created the enabling environment for farmers as far back then, who at the time of planting their crops, desire confidence in the price that they would receive when they sold their crops, to approach the commodity market, to receive prices in current market values, from those who were less risk averse to what would happen upon harvesting of such crops.
While agricultural production risks depends on the farmer’s effort, the climate, insects, etc. the same may not be said for a country’s infrastructural needs, especially where such needs are at the primary levels. This is because security markets depend on data, the absence of which it may be absolutely impossible to underwrite risk. Further, judgments about risk are crucial to securities pricing.
The arguments by economists that security markets are welfare improving are primarily borne out of the understanding that security markets assist in completing markets by allowing investors with different risk tolerances to share risks, thereby supporting all kinds of investment or economic activities.
Commercial banks’ inabilities to fund primary infrastructure projects are based on the nature and missions of banks. They have short term liabilities, i.e. deposits which can be used to fund loans. Banks do not and cannot lend all their funds, by regulatory fiat, they must keep some capital. Banks earn profits on the spreads between their loans and their cost of funds, the cost of funds is the weighted average of returns to depositors (deposit rates) and return to capital (the difference between required return on equity and a safe rate, e.g. short term treasury rate).
Effective bankers are traditionally concerned with the default probability and severity, default volatility, and capital requirements.
For a banker to profit on a loan, it must earn a greater spread. For example, if a project has a 30 percent default probability and a 30 percent loss severity, it is almost impossible to make it feasible under any prudent circumstances.
This is because the spread required for the financing to be profitable or to make up for the risky loan is high, making the loan itself riskier.
Primary infrastructure financing is a complicated type of loan. There are almost no available data to predict their success or failures, hence a banker sees these types of loans as very risky. In Nigeria and indeed most African countries there are no available data on these loans and available predictive models remain rudimentary. The only available instrument to make predictions on these loans is human judgment. These primarily account for the rationale behind bankers shying away from these kinds of funding.
The other reason why banks shy away is the availability of capital. Bank customer deposits are guaranteed by the Federal Government through the Nigerian Deposit Insurance Corporation (NDIC). NDIC insured banks are required to hold capital, such capital portfolios are tied to the riskiness of their loan portfolios.
Investments in treasury bonds for example, carry low capital requirements, but in business loans, the percentages are higher. Banks also have local expertise and understanding of the markets for infrastructure. Bankers know the geographic space in which infrastructure are to be located. A toll road construction in Lagos State for example, may receive more support from bankers than if the toll road project was located in an outer state in Nigeria where markets and economic activities are rudimentary stages.
Private Public Partnership Options
Public Private Partnerships (PPP) have increasingly become one of the most misused words in development economics. The concept has its limited utility and its blanket use as a meaningful alternative for constructive infrastructure development smacks of either ignorance or disingenuous. PPPs as used in Nigeria and several African countries with deficit infrastructures refers to a government service or private business venture, funded and operated through a partnership of government and private sector operative or operatives, with the private sector providing some or significant portions of the funding.
Usually, the private sector provides the management know how to carry out the project and or manage such project.
For primary infrastructures, PPPs will require establishment of services or building of major infrastructures by raising private funds. Such tasks in developing economies face the same problems faced by commercial banks in funding such investments. Even investment bankers or private equity firms, using internal funds will still have to weigh the opportunity costs of such projects.
PPPs are most effective when called upon to manage established infrastructures, such as a completed highway that may require effective management and collection of tolls. The management and collection of parking meter funds, the removal of waste systems, or the management of an established water treatment plant, are some of the areas that a PPP agreement will unleash the advantages of the private sector efficiency. The idea or contention that private provision of infrastructure represents a way of providing such infrastructure at no cost to the public is false.
To be economically viable, a PPP project should be limited to services delivering greater value for money than other forms of procurement, there must exist sufficient and competent regulatory and legal regimes with sufficient knowledge to regulate such area or industry where the agreement exists. The transfer of significant portions of the business risks involved to the private operator, and the contractibility of such project.
Leadership in the public or private sector comes to the fore in times of crisis. Nigeria’s infrastructure deficits require visionary leadership. Public sector operatives, elected or appointed, who aspire to provide effective leadership undoubtedly need the efficiencies inherent in privately run corporations or businesses.
Approaching private free market operatives require adequate understanding of the visions and corporate cultures of such operatives. A competent private management team though driven by profits is also aware of the pitfalls inherent in a relationship with ill equipped public institutions. PPP concepts or the use of the terms must not be mechanisms to move investments off public budgets or shift liabilities to the future.
Such off budget expenditures rarely guarantee continuity. PPPs are not instruments to blur the line between public and private risks and economic ownership. Specific PPP projects require technical knowledge from the public sector operatives entering such contracts.
A National Infrastructure Bank for Nigeria
Nigeria has over the past 30 years experienced the importance of pooled institutional panaceas for specific projects. The Petroleum Trust Fund (PTF), peddled by various military administrations had some successes in directing funding to specific projects. The Infrastructure Concession and Regulatory Commission (ICRC) seem properly positioned to leverage the best practices available in the infrastructure funding space.
The ICRC need to engage in a massive collation of the basic primary infrastructure needs across every local government area in Nigeria. The country is blessed with abundant skills, and a competent ICRC should tap into this pull, marshal out a 36 state plan that provide absolute understanding of the developmental needs of Nigeria.
Attempts at attracting private participants in any fashion in responding to our infrastructure needs will only succeed where there is ample information, verifiable data, and genuine interests put out to the market by a committed public institutional operative.
The 2010 federal budget earmarked about $12 billion for capital expenditures and there are now concerted efforts at setting up a Sovereign Wealth Fund for Nigeria. $12 billion capital budget is not negligible and a properly managed Sovereign Wealth Fund represents an appropriate complement in pursuit of accelerated infrastructure funding channels for Nigeria.
The importance of increased funding for capital infrastructural projects cannot be overstated, it is also important to create efficient mechanisms in the way the various tiers of our governments invest in infrastructure. There seem to be some elements of merit in the way the federal government selects its capital expenditure projects, for example, the concerted attention now being paid on the power sector. There also seem to be a bias against maintenance and little or no attention paid to long term planning.
Efficient allocation of scarce resources in a large pool of needs is a settled economic principle. To achieve this, Nigeria needs an Infrastructure Investment Bank. A Nigerian Infrastructure Investment Bank (NIIB), with a mandate to operate, pool all local governments, state governments, and federal government resources on infrastructure, marshal out a long term plan, develop a permanent capacity for infrastructure investment, will have the scale to direct developments across all spheres of the national economy.
If properly structured and granted the political autonomy necessary to carry out the infrastructure funding of Nigeria, a NIIB will be able to develop and balance the rate of return priorities of a commercial or investment bank with the policy goals of a federal agency.
This concept is not new. Over the past five decades, the European Investment Bank (EIB) has functioned successfully, connecting the European Union (EU) across national borders. It has more than $300 billion in subscribed capital by all the 27 EU member countries. In 2009 for example, the EIB disbursed nearly $80 billion in transportation and energy loans to member countries infrastructure projects. It does not maximize profits, though it functions as a bank, not a grant making agency.
It raises funds from capital markets and lends its funds at higher rates, keeping its operations financially sustainable. It offers debt instruments, loans, and debt guarantees, technical assistance, etc. One of the greatest advantages of the EIB is that it has developed the expertise to understand the micro details of infrastructure funding. No PPP contracts requiring significant investments go through the entire EU, without the EIB input. For one thing, such projects will require funding.
An infrastructure investment bank in Nigeria presents some potent questions, but such concerns or questions should be viewed in terms of the reach of such agency. For Nigeria, an infrastructure investment bank should improve the federal, state, and local government investment processes in infrastructure assets. It should be a properly staffed and highly skilled entity with multi jurisdictional reach.
It should allow for application from all infrastructure areas. Such agency may be housed within the ICRC, with sufficient autonomy to function within the supervisory purviews of the Central Bank of Nigerian (CBN). It could be wholly government owned, not necessarily in the mode of the Asset Management Corporation of Nigeria (AMCON) or it could be shareholder owned corporation, such as a government sponsored enterprises (GSE).
At the core of an infrastructure investment bank for Nigeria is an efficient decision making process in all aspects of infrastructure projects. Better decision making eliminates the multi jurisdictional project log jams that currently afflict our basic infrastructures in Nigeria. For example, the gross mismanagement of the Lagos Benin Highway that cut across states can be properly managed by a national infrastructure bank with the capacity to pool all the various resources available to such projects.
The quest for a national system of railway construction and railway transport system will be better funded by such an agency, a uniform system of airport construction and management will also benefit from such agency, etc.
A federal investment process requiring rewards for performance, with clear accountability from the recipients and the federal, state, and local governments include some of the advantages of an infrastructure investment bank. Better selection process taking into consideration project funding capacities, the need for multi_year successes, not beholden to election cycles, contribute to the advantages of an infrastructure investment bank over the current mechanisms in the country.
Current infrastructure funding mechanisms in Nigeria lack appropriate performance standards. This deficiency is at the core of cost overruns, lack of ability to complete projects over specified contract periods, the associated sharp and corrupt practices within the awarding agencies and the contract officials, etc. An infrastructure investment agency will bridge these problems.
It will be in a better position to enforce performance bond provisions of its contracts, because delays imply additional costs in both interests on capital funds and lost or diminished public expectations. Such an institution will not be entangled in sector specific standards and it is better prepared to compel its beneficiaries or applicants to adhere to performance baselines. Because funds from the agency are loans, not grants, recipients are forced into fiscal disciplines tied to project outcomes.
A globally competitive Nigeria depends on our infrastructure base. We now live in a world that is connected in trade and commerce and national wealth now depends on the ability to take our products to other parts of the world. Our ability to attract experts and people with appropriate business skills into our economy, be they Nigerian citizens or foreigners depends on the infrastructure base of our country. These are serious economic requirements that require precision in their execution.
Proper visionary leadership in this spheres of our national economy require long term goals that will put in place permanent vehicles for their achievement. A Nigerian Infrastructure Investment Bank represents a decisive concrete step towards a permanent solution in tackling our infrastructural deficits.