Stephen Macharia, head of Investments at FSD Africa, in this interview with Folake Balogun, discusses how green financing can assist Nigeria’s quest to reduce infrastructure deficits as well as how FSD Africa aims to drive a significant increase in the accessibility of finance for climate-aligned infrastructure projects in Nigeria.
Nigeria will be able to meet this challenge by exploring the use of green bonds and other sustainable financial instruments that can attract investors interested in environmentally responsible projects.
Nigeria requires an estimated US$3 trillion to finance its infrastructure deficit over the next 30 years, according to the IMF. What innovative ways can we leverage to bridge this infrastructure gap given the obvious challenges with public revenues?
I believe this challenge is faced by many countries and more so on the continent and in our view, this challenge can be essentially by Nigeria leveraging private sector investment, public private partnerships as well as attracting foreign direct investments in order to mobilise sufficient funding.
Additionally, in our view, Nigeria would be able to meet this challenge by exploring the use of green bonds and other sustainable financial instruments that can attract investors interested in environmentally responsible projects. By adopting a mix of creative financing mechanisms, Nigeria can address its infrastructure needs while advancing sustainable development goals.
In terms of examples of these types of collaborations, FSD Africa in an engagement with Nigeria recently had an engagement from our risk and resilience team where FSD Africa together with the National Insurance Commission (NAICOM) partnered to build staff capacity for the development of Risk-Based Capital Framework and incorporation of ESG principles into its operations. Incorporating ESG strengthens risk based capital training for market players in the market.
Separately, we as FSD Africa also have a partnership with FMDQ Group aimed at bridging gender finance gaps in Africa.
What does FSDAi aim to achieve by increasing the accessibility of finance for “climate-aligned” infrastructure projects in Nigeria?
Essentially what we seek to achieve is to drive a significant increase in the accessibility of finance for climate-aligned infrastructure projects and this is by providing funding and support for such projects. What we are seeking to do is promote sustainable development and enhance Nigeria’s efforts in terms of mitigating climate change and through these investments, we will be supporting Nigeria’s infrastructure capabilities, addressing environmental challenges while contributing to a more sustainable and resilient future.
These really are our goals and they fit in with FSD Africa’s vision and mission which is to essentially make financial markets work. In this case, we are trying to make a particular market around the funding of climate-aligned infrastructure projects work.
How will the Risk Sharing Backstop Facility (RSBF) help Nigeria accelerate its social and economic development and green economic transition?
The risk-sharing backstop facility will support Nigeria in fostering a green economic transition by providing a risk-sharing mechanism that is aimed at mobilising local funding for these projects.
The Risk Sharing Backstop Facility, in this case, will incentivise private sector involvement in the financing of climate-aligned infrastructure projects leading to increased investment, job creation, and improved infrastructure which will ultimately drive economic growth and promote environmentally friendly initiatives. All these would again align with Nigeria’s sustainable development goals. This would be in keeping with FSD Africa’s investment thesis of the green transition underpinning social and economic development.
The RSBF will raise funding in the series, initially from FSDAi, and eventually from other funders – aiming to reach a total capital base of up to US$50m. What is the timeline for the capital raise and who are the likely funders?
The Risk Sharing Backstop Facility (RSBF) aims to raise funding in a series of rounds, starting with an initial contribution from FSDAi being an anchor and eventually attracting other funders with the goal of reaching a substantial capital base of at least $50 million. While the timeline for this capital raise has not been disclosed in the announcement, we anticipate collaborating with a diverse group of investors, financial institutions, and development partners who share these same commitments to advancing sustainable infrastructure in Nigeria.
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Who are the likely funders of these projects?
The likely funders are in multiple categories. This is strictly at the facility level, if you look at the $50 million, we are at the moment looking at development finance institutions that would be able to join us and participate in this particular funding.
We are also interested in local types of capital, for example, the Nigerian Sovereign Investment Authority may be one of the parties that are interested in either participating in this facility or partnering with us. We are not excluding that type of capital, but we are quite aware that we have to get going first and then eventually we will have more funders coming along.
Why is it so important today, perhaps even more than any other time in the past, to target local currency funding for sustainable infrastructure development in Nigeria?
I believe it has always been critical. What we have established is that there is a lot of local funding available within Nigeria, whether with asset managers, pension funds, or banks. However, due to a mismatch between the perception of risk and the real risk in some of these projects, there has been no funding available for these types of projects.
We believe that the Risk Sharing Backstop Facility will help unlock this type of local funding and if this type of local funding flows through, in the long run, there will be no need for foreign funding to support sustainable infrastructure investments in Nigeria. We aim to essentially play a catalytic role in getting this type of local capital to be comfortable with these projects and through that allow for future participation from local sources of capital.
The funding from local players is in abundance however, the appetite for taking on projects at this risk level has not been there before and the Risk Sharing Backstop Facility is coming in and trying to bridge that gap between the perception of risk and what the real risk is.
What impact is the currency depreciation likely to have on your capital-raising activity this year?
Currency depreciation will not have an impact on our fundraising at the facility level. We are raising funding in foreign currency and applying it or availing it in Nigerian markets in naira form hence currency depreciation will not affect our ability to raise funding.
Currency depreciation is a lived reality on the continent, and it is not a situation that is unique only to Nigeria. There are new changes that have been pronounced by the government in respect of the currency and these are positive as they remove some of the uncertainty in the operating environment that was previously there.
How do you intend to mobilise local institutional investment into climate-aligned infrastructure projects?
The Risk Sharing Backstop Facility as currently designed is intended to provide credit enhancement to local funders such as banks, asset managers, or pension funds. It will allow this type of local financing to participate in projects in the form of lending, and be representative in terms of the mobilisation of local institutional capital.
We expect that once these projects have become bankable and have shown a cash flow profile, they will be able to go to the local capital markets, issue a project development bond, and be able to raise from the local investors. This would represent the second-order level of local capital mobilisation facilitated by the Risk Sharing Backstop Facility (RSBF). The proceeds from these capital market issues would be used to retire the funding earlier procured from the banks and asset managers and underwritten by the RSBF.