Any realistic assessment of the total capital requirements for physical infrastructure roll-out and maintenance in Nigeria will reveal quickly the inadequacy of government resources to meet the challenge. Amidst multiple, urgent, growing and competing priorities of various kinds for public sector funding, it has now become simply irresponsible for any government or state-owned enterprise to rely solely on its annual budget for long-term infrastructure finance. Even more than budgetary resources, governments will also always be constrained in terms of actual human capacity (persons, time and expertise) to meet a significant proportion of the challenges entrusted to their care. It becomes prudent therefore for everyone in government or public office to think about the important question of how to craft a fiscally-neutral infrastructure strategy that can crowd-in development support.
Firstly, a definition. Put simply, a fiscally-neutral strategy for infrastructure is a procurement approach that seeks to deliver long-term, sustainable projects with as little recourse to the public purse as possible. In short, it is a strategy that will aim to create public infrastructure that pays for itself. This might sound like a radical or impossible idea, but it is in fact the simple basis for much infrastructure development planning and financing everywhere in the world (including in many African countries). Everything from ancient canals and turnpikes, to modern roads, bridges, air, sea and river ports, gas pipelines, and electricity supply infrastructure have been built with fiscal neutrality at the core of government thinking.
Secondly, it is important to define early what a fiscally-neutral strategy does not mean. The fundamental ideas behind this strategic approach are revenue generation from user charges, coupled with effective risk allocation (and not the award of private concessions, as often erroneously assumed). Indeed, concession agreements and so-called public private partnerships (while important and useful legal tools) are not the only means by which a fiscally-neutral infrastructure strategy can be delivered. Rather, the key concepts that matter are careful project planning, user identification and willingness to pay, construction and operational risk allocation, viability gap funding, and limited recourse financing.
Various legal and commercial mechanisms for giving effect to this same strategic objective have been deployed in multiple jurisdictions – including turnpike trusts, fuel taxes, road funds or boards, direct tolls, city charters and development levies; typically combined with risk allocation tools like Engineering, Procurement, Construction and Financing (EPC-F) contracts and Performance Agreements. Essentially, the goal is to ensure that infrastructure is built on time and budget, and revenues from user payments strongly support the debt service coverage and annual maintenance costs of the assets so constructed. Taken together, these frameworks are project finance tools which serve to expand the borrowing and delivery capacity of governments in the area of public infrastructure, while tapping into broader sources of credit and investment.
Specific to Nigeria, there have been recent calls for a massive infrastructure bond program to be issued by the government (and underwritten by long-term pension fund assets). My contribution to this debate would be as follows: by all means, yes! But on the condition that this must be a fiscally-neutral infrastructure bond issuance program
Specific to Nigeria, there have been recent calls for a massive “infrastructure bond” program to be issued by the government (and underwritten by long-term pension fund assets). My contribution to this debate would be as follows: by all means, yes! But on the condition that this must be a fiscally-neutral infrastructure bond issuance program. Now, what might the enabling legislation behind this initiative look like in practice? I will describe a few features of my ideal version of such a program. Firstly, a diversified scope of projects is important, to include commercial roads, rail lines, sea and river ports, gas pipelines, border posts, airports and industrial or agro-processing infrastructure. Next, qualifying projects must have secured at least a third of their financing from sources other than the government infrastructure bonds (ideally from local banks, development financiers, export credit agencies and InfraCredit-covered bonds).
For risk management purposes, EPC-F frameworks ought to be utilised, which allocate completion, financing and maintenance risks properly to credible contractors, backed by well-rated performance bonds. In relation to governance, a central body might be entrusted by government to oversee the day-to-day operations of the program (issuance, procurement, disbursement), superintended by an independent board of trustees with credible senior representatives from both within and outside public service. Viability gap contributions into projects would be sized based on competitive tenders, and duly included in the annual appropriations of the relevant procuring agency, government or enterprise. The overall mandate of the program will be to deliver a fiscally-neutral portfolio of projects, backed by the full faith and credit of the government as issuer of the bonds.
One central body already does an excellent job in relation to public debt oversight in Nigeria, and that is the Debt Management Office (DMO). According to them, the total stock of domestic and international public debt of the Federal and State governments in the country amounted to N26.21 trillion as at September 2019. That sum will increase by at least N1.59 trillion during 2020, based on Federal borrowing alone as outlined in the Appropriation Act for this year (with an estimated debt service cost of N2.75 trillion). This works out to an approximately $73 billion portfolio requiring $7.6 billion to sustain, a figure that is already daunting relative to the government’s very limited annual revenue. A well-structured program of fiscally-neutral infrastructure bonds would ensure that any and all additions to this debt portfolio are channelled into projects which generate revenue to pay their own way (and are economically impactful), freeing up budgetary resources for the myriad other financial commitments of governments across the country.
FOLA FAGBULE
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