InfraCredit, development partners set to unlock long-term funds for infrastructure

InfraCredit, an infrastructure credit enhancement institution with GuarantCo, Private Infrastructure Development Group (PIDG), and the International Finance Corporation (IFC), collaborate to support investor capacity building, and knowledge sharing in the Nigerian infrastructure finance sector.

It is expected that the successful operation of InfraCredit will address the constraints facing the Nigerian pension market, and other long-term investors, thereby increasing their involvement in investing in long-term bonds to finance infrastructure assets.

At the first investor workshop under the capacity building programme held in Lagos, last Friday, themed: “Unlocking Pension Fund and Insurance Investment in Infrastructure Debt Issues,” the organisers noted that investments in infrastructure-related corporate bonds in Nigeria are currently limited due to low-risk appetite, and limited asset classes to invest in.

The workshop was to enable participants have an interactive conversation with regulators and other stakeholders to discuss and critically evaluate, among other points, how Nigeria can leverage experiences in other markets to overcome prevailing constraints, and unlock financing for its infrastructure particularly through the use of credit enhancement tools.

“This workshop is a capacity building programme aimed at further empowering, and informing the key potential institutional investors in the country’s infrastructure market in order to stimulate capital formation for infrastructure development,” said the Chief Executive Officer, InfraCredit, Chinua Azubike, on the sidelines of the workshop.

He noted that “developing our domestic debt capital markets and strengthening the capacity of domestic institutional investors is the sustainable path to connecting the infrastructure finance market to long-term local currency financing.”

According to the Nigeria Integrated Infrastructure Master Plan (NIIMP), the country needs to invest $3trillion to deliver quality infrastructure across different asset classes, including energy, transport, ICT, housing, water, agriculture, mining, social infrastructure, vital registration and security over a 30-year period.

To bridge the current infrastructure gap, and reach the desired optimal investment, NIIMP said Nigeria must increase core infrastructure stock from 35-40 per cent of the gross domestic product (GDP) in 2012, to 70 per cent by 2043 (prior to GDP rebasing).

Most developed countries typically have ‘core infrastructure’ stock (roads, rail, ports, airports, power, water, ICT) equal in value to about 70 per cent of GDP, with power and transportation infrastructure usually accounting for at least half of the total value.

According to NIIMP projection (2014-2018), an investment of $127 billion is required over the next five years (“the 1st Operational Plan Period”) translating to an average of $25 billion per annually.

Nigeria’s infrastructure deficit is very large and will require multiple and interrelated market functions to work effectively. Therefore, one of the key reasoning behind the creation of InfraCredit is to attract significant new capacity to the infrastructure finance market from the domestic pension funds, insurance companies, and other long-term investors.

Participants at the workshop included regulators such as the Nigerian Securities and Exchange Commission (SEC), other participants were the AFC, Nigerian Sovereign Investment Authority (NSIA), FMDQ OTC Exchange, chief executive officers, chief investment officers, risk managers, and board members of domestic pension fund managers and life insurance firms.

“Our belief is that investor capacity building can play a critical role in unlocking the potential for sustainable long-term infrastructure finance by strengthening investors’ analytical skills in understanding infrastructure as an asset class, and pricing the risk rating of credit enhancement tools.

“This is expected to deepen the participation of pension and insurance firms as natural investors in infrastructure assets” said Azubike in his opening remarks at the workshop.

Participants at the investor workshop were sensitised on credit enhancement, its benefits and pricing, as well as approaches to investor protection. They also discussed issues bordering on credit rating methodology for infrastructure finance guarantors, secondary market liquidity on Infra Bonds. Besides, they learnt how to price credit and liquidity risk.

Chief Executive Officer, GuarantCo, Lasitha Perera, said the investor workshop exposed participants to the means of using credit enhancement to motivate long-term bonds for financing infrastructure investment, and identifying the existing products and potential deal flow.

GuarantCo is a member of the PIDG sponsored by five G12 governments. It provides guarantees to lenders to support local currency finance for infrastructure projects in low-income countries, promoting domestic infrastructure financing and capital market development.

“The emphasis (of the workshop) was on identifying the sustainable path to increasing the capacity of pension and insurance funds to invest in the infrastructure sector in the long term,” Perera said.

In his closing presentation titled, “a tale of two countries”, Perera drew a contrast between South Korea and Nigeria, two countries that shared similar economic and demographic characteristics in the ‘70s.

He highlighted how South Korea’s pension funds and other long-term private sector investors have accelerated economic development through long-term infrastructure investments as reflected in the country’s high domestic private sector credit to the GDP.

Perera said InfraCredit was established as a critical tool to play a catalytic role towards achieving a similar result in Nigeria, by attracting Nigerian pension and other investors to see infrastructure as an asset class.

InfraCredit was established by the NSIA in collaboration with GuarantCo, with the key mandate of issuing guarantees to enhance the credit quality of local currency debt instruments issued to finance eligible infrastructure related assets in Nigeria, thereby acting as a catalyst to attract the investment interest from pension funds, insurance firms and other long-term investors.

InfraCredit’s guarantee of timely principal and interest payments to investors is backed by a claims-paying ability that has been rigorously tested by major local rating agencies, and accorded an ‘AAA’ national scale rating by Agusto & Co. and GCR, an indication of the protection afforded to investors against credit risk.