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Assessing alternative funding for infrastructure amid fiscal constraints

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The Nigerian government, like other developing countries, continues to face significant challenges in implementing programmes to build basic infrastructure through traditional funding sources like public expenditure and development finance aids.

These sources of financing have been found to be inadequate, as evidenced in Nigeria’s infrastructure gap. The country needs an estimated $100 billion or N36 trillion annually to address its infrastructural shortfall, according to The Minister of Finance, Zainab Ahmed.

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Indeed, infrastructure development is very important for a country’s sustained economic growth and competitiveness. Well-developed infrastructure has the potential to increase productivity, which leads to poverty and unemployment reduction, facilitates trade, and promotes innovation in an economy.

Unfortunately, Nigeria and many other sub-Saharan African countries have huge infrastructure deficits with attendant low economic development.

This is measured through levels of physical capital of roads, public education, electricity production, health infrastructure, and access to treated water.

Given the need to bridge the infrastructure deficit and financing challenges, Nigeria needs to leverage alternative sources of funding such as the capital market.

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Chief Executive Officer, Chapel Hill Denham, and Chair, Steering Committee, FMDQ Debt Capital Market Development Project, noted that the government budget, which is essentially about $26 billion, it is only seven and a half per cent that is going into critical infrastructure, which is somewhere around $2 billion annually.

“Nigeria’s annual infrastructure needs today is about $35 to $40 billion, and what it means is that the government’s wallet, no matter how you stretch, is completely inadequate. There is no magic that can change the figure. Government’s tax space in a short term or any other source of revenue in a short term cannot make any change.

“Nigeria like other parts of the world must wake up to the reality that it is all about private capital, and that without private capital you cannot really get the necessary infrastructure spending needed for substantial for economic growth.”

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According to him, Nigeria represents an incredible opportunity, not only in physical and economic infrastructure but also in the areas of social infrastructure.

He insisted that “Nigeria has a big problem, and what is that big problem? When you put together all of the efforts and all of the dollars that go into infrastructure in Nigeria today, we are literally only sweeping the surface.

“The rest of the world has already known that there is not really so much that the development finance institutions (DFIs), and other initiatives can do on their own. The only way to achieve this is by utilizing the capital market and specifically through the debt capital market.”

He added: “Today, institutional fund managers globally, have $140 trillion of capital and listed infrastructure. There is also an increasing commitment to institutional capital. Private capital is pivotal to infrastructure financing through bonds and funds because they represent a sustainable funding source.”

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Director, Centre for Economic Policy Analysis and Research (CEPAR), University of Lagos, Prof Ndubisi Nwokoma, admitted that it is proper for the government to assess alternative sources to finance infrastructure given its current fiscal constraints.

He said: “First, the government can reduce its fiscal constraint by cutting the cost of governance. There’s too much focus on revenue relative to expenditure. Cutting the cost of governance would imply harmonizing the functions of the Ministries, Departments, and Agencies (MDAs) of government, in line with the Oronsaye Report.

“Expenditure votes for the three arms of government need drastic reduction, particularly for the executive. Next, the targeted project borrowings – adopting the public-private-partnership (PPP) option can be implemented and backed by user charges for loan repayment.”

However, he stressed the need to exercise caution while accessing the domestic market for funding to avoid crowding out the private sector in the credit market.

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Ahmed, at a World Bank Group workshop on, “Maximizing finance for the development of infrastructure in Nigeria,” was quoted saying that the Federal Government will require about $100 billion annually for the next 30 years to effectively tackle the country’s infrastructure challenges.

She noted that with the shortfall in oil revenue, which has plummeted in recent times, it will be difficult to address the infrastructural deficit.

She said the time had come for the government to start looking for alternative sources of funding infrastructure, as budgetary funding alone cannot address the funding gap.

The government, in recognition of this, is doing its best to close the infrastructure gap, as outlined in the Economic Recovery and Growth Plan (ERGP) for 2017-2020.

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The ERGP builds on existing sectoral strategies and plans, such as the National Industrial Revolution Plan, and the Nigeria Integrated Infrastructure Master Plan. The ERGP will strengthen the successful components of these previous strategies and plans while addressing the challenges observed in their implementation.

The ERGP is also consistent with the United Nation’s Sustainable Development Goals (SDGs), as it addresses SDGs three dimensions of economic, social, and environmental sustainability issues.

It emphasizes investment in infrastructure, especially in power, road, rail, port, and broadband networks. It builds on on-going projects and identifies new ones to be implemented by 2020, to improve the national infrastructure backbone.

The private sector is expected to play a key role in providing critical infrastructure, either directly or in collaboration with the Government under a PPP arrangement.

An independent investor, Amaechi Egbo, said there are various sources of funds available in the capital market, which can be harnessed for infrastructure development, some of which are Pension Funds, Real Estate Investment Trusts (REITs), Collective Investment Schemes (CIS), among others.

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In addition, there are various capital market instruments that can be used for infrastructure financing, including the infrastructure project bonds, Sukuk, infrastructure debt bonds, green bonds, and revenue bonds.

According to him, infrastructure development is a long-term project, which requires mobilisation of the long-term fund, noting that this can only be generated through the capital market.

Egbo explained that one of the major functions of the capital market is to mobilise funds from areas of surplus to where they are needed while submitting that the current revenue being generated cannot handle infrastructural demand of the country.

He added that the market is capable of generating economic activities that can exceed the revenue generated in Nigeria.

“The market is bigger than the nation because the boundaries are not limited to Nigeria. So if you want to develop any infrastructure take for instance the railway, the railway requirement is bigger than what the present revenue can handle, but can still be developed through funding from the capital market.

“Nigeria’s infrastructure is looking for funding – long term funding, and the capital market on the other hand is looking for investment grants to finance.

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