Amid revenue shortfall, expert says blended financing could help Nigeria plug $31trn infrastructure gap

A kind of financing solutions that leverage concessional capital from public and philanthropic sources to de-risk transactions to attract private investment could be Nigeria’s bet in solving its huge infrastructure deficit, according to Lade Araba, managing director for Africa at Convergence Finance.

Government’s already low revenue streams have suffered a huge collapse, worsened by the pandemic, making it necessary for Africa’s biggest economy to tap a blend of financing from both local and foreign investors to fund huge infrastructure deficits that will require annual financing of $100 billion over the next 30 years to address.

“COVID-19 has exacerbated existing macroeconomic challenges facing Nigeria’s economy. With that, the demand for blended finance has increased as a result, and we expect a sustained appetite from investors in the medium term to stimulate the economy and to drive economic reconstruction by financing projects across various sectors,” Araba said in an exclusive interview with BusinessDay.

Being Africa’s largest economy with a sizeable market and numerous investment opportunities, Nigeria has been a prime target market for blended finance.

From sectors such as financial services, energy, health and agriculture, Nigeria has seen $8 billion in financing flow towards 51 blended finance transactions, and there is scope to significantly increase the volume of financing and the number of transactions reaching financial close and subsequent implementation.

But that has been driven hugely by foreign investors, with domestic institutional investors including pension funds and insurance companies investing most of their funds in government securities, whose yields have turned negative in real terms due to rising inflation, according to Araba whose firm, Convergence Finance, built largest global database of closed blended finance transactions comprising 600 deals across Africa, Asia, and Latin America and the Caribbean.

Araba, a seasoned development finance professional with over 17 years of experience, said to preserve capital, domestic institutional investors will need to diversify their portfolios and consider alternative asset classes.

“Given that government securities have historically delivered attractive yields, local investors have not needed to consider alternative asset classes. They have enjoyed the low risk, plain vanilla or uncomplicated investment opportunities offered by these securities,” Araba told BusinessDay.

“However, the current environment presents an opportunity for them to consider and actively invest in alternative asset classes in earnest,” she said.

From bonds to treasury bills – which have been a safe haven for pension fund administrators, snatching more than half of their portfolios – yields on fixed-income assets have tumbled reaching near zero, after the Central Bank of Nigeria banned non-local investors from investing in short-term OMO bills, a move that sparked excess liquidity in fixed income and equities.

When adjusted for inflation, yields on fixed-income assets have largely been negative.

The economy of Africa’s most populous country has slipped into its biggest recession since the 1980s and would probably shrink by 3.25 percent this year, according to IMF estimate.

Worse still, inflation has headed north for 15 consecutive months, the local currency continues to depreciate, and there is an acute shortage of foreign currency. Added to these, the political situation is volatile, declining levels of government revenues, ballooning public debt and depressing investor confidence.

“We have already seen some foreign investors unable to repatriate their profits due to the FX crunch, while others reduced their investment portfolios by $15.7 billion in the first quarter of 2020,” Araba said.

Araba, who previously served as technical adviser to a former Nigerian minister of finance, said given the inelasticity of demand for infrastructure and its stable cash flows, it is well aligned to the investment needs of pension funds. The participation of other institutional investors, such as insurance companies (with assets valued at about $467 million for life insurance and about $648 million for non-life) and the Nigerian Sovereign Investment Authority (NSIA – the Sovereign Wealth Fund), is equally important. And, infrastructure facilitates the long-term asset-liability matching requirements of these investors.

According to her, the multiplier effect created by robust and high-quality infrastructure is well documented. The economic return averages 5-25 percent for every dollar spent, leading to inclusive economic growth, job creation, a stronger business enabling environment, and an improvement in living conditions given the provision of basic public services.

Also, national productivity and competitiveness are often higher in countries with adequate infrastructure. Sustaining strategic infrastructure investment is, therefore, a critical and urgent requirement to transform Nigeria’s economic trajectory and to help it achieve its industrialisation aspiration.

“However, it is clear that alternative sources of capital are required, given the already stressed public purse,” Araba said.

She recommended stimulating and enlightening local investors’ interest in alternative asset classes, certainty and sanctity in contracts, ease of obtaining the necessary licences and permits, cost-reflective tariffs and non-political interference to help boost investor confidence and appetite as some of the ways Nigeria can attract more investors to bridge its infrastructure gap.

*See full interview on Monday, December 28, 2020.

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