• Thursday, May 23, 2024
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Port projects risk delay on volatile naira

Port projects risks delay on volatile naira

Billion-dollar new port and marine projects in Nigeria in their preliminary development stages are contending with higher cost of borrowing funds, depreciation of the naira, and foreign exchange volatility.

With the recent adjustment in the benchmark interest rate by the Central Bank of Nigeria by 400 basis points to 22.75 percent, experts say investors would find it difficult to source funds to invest in marine projects.

Nigeria has a $1 billion port development plan that involves the rebuilding of the existing Apapa, Tin-Can and Onne Ports’ infrastructure as well as the construction of new seaports in Badagry in Lagos, Snake Island in Lagos, Bonny in Rivers, and Ondo, among others.

Read also: Oluwafemi Bewaji’s remarkable journey in managing successful logistics & haulage projects, propelling Nigerian Ports to new heights

The uncertainty in the FX market and the weakening of the naira are macroeconomic issues that can delay the implementation of these projects.

For instance, fluctuations in FX rates may disrupt cash flow projections, making it difficult to secure financing for the project.

It may also delay the procurement processes for the project due to sudden cost adjustments, BusinessDay has learned.

Deji Olowo, an investment expert, said the naira devaluation and FX issues can make it more expensive for project developers to secure foreign financing.

“Lenders may be reluctant to provide funding for any construction project, especially for the port industry due to increased exchange rate risk, or they may impose stricter terms and conditions such as higher interest rates or collateral requirements,” Olowo said.

According to him, the rise in interest rate has raised the cost of borrowing which will hit ongoing port projects hard.

“Weak naira can lead to disputes over contract terms, particularly if exchange rate clauses are not clearly defined while FX instability can introduce additional risks and financial losses for the project stakeholders,” he said.

BusinessDay findings show that port projects come with the importation of equipment, machinery, and technology, but with the naira weakening to 1,608.98/$ as of March 14, the cost of importing this equipment will increase in local currency terms.

Also, further deprecation of the naira can fuel inflationary pressures, which will impact negatively on the cost of project development.

It can also increase the cost of labour, materials, and services, which will further strain project budgets.

Read also: Akwa Ibom moves to actualise Ibom Deep Seaport project

Olabode Makanjuola, CEO of Caverton Offshore Support Group, told BusinessDay that naira devaluation and FX volatility are macroeconomic issues that affect everyone and adversely affect the shipping industry because engines and navigational equipment used for marine-related projects are all imported.

“A hike in the cost of funding projects will make investors and marine companies see port projects as not financially worthwhile,” Makanjuola said in response to questions.

He said this will make borrowing from banks difficult as the rise in interest rates translates to a higher cost of funds.

Aside from cost escalation and difficulty in forecasting accurate project costs by planners, experts believe that the delivery timelines would be lengthened and for port projects that take years due to their complex and capital-intensive nature, it would take more years.

The cost of port projects depends on the size, the depth of the channel, the quality of supporting infrastructure such as roads and railways, and the necessary environmental mitigation measures.

Ayorinde Adedoyin, chairman at Peacegate Group, pointed out that every business that earns in naira today faces the challenge of how to source the dollar to run the business.

Adedoyin said that borrowing from Nigerian banks has not been fantastic even before the recent adjustment in interest rates by the apex bank.

“It is not only the interest that kills the business but other charges that come with it and they can add up to an extra 10 percent to the rate. This makes it difficult for businesses to be able to service bank loans, pay salaries, and meet other bills. High cost of borrowing is not good for the development of the maritime industry and is also not

good for other businesses like the manufacturing sector,” Adedoyin explained.

Another macroeconomic factor that affects investment and port projects is the issue of unstable and high FX rates in calculating import duties, particularly because a majority of equipment for port projects is imported.

Read also: Customs assures of seamless operations at Lekki Port

Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said Nigeria needs to get the FX environment right to attract sufficient capital inflow needed for economic growth.

He said fluctuation in FX rates for customs duties calculation and sourcing of funds create problems of uncertainty and volatility for investors.

“The cost of imports is already extremely high due to currency devaluation. Dealing with a situation of highly depreciated currency and high import duty at the same time has implications for trade, investment, and planning,” Yusuf added.