State infrastructure financing: Seeking a model that works

Like many sub-Saharan African countries, Nigeria has a huge infrastructure deficit, a challenge that is often blamed for its poor economic performance and low job-creating capacity.

With its stock estimated at 20 per cent of Gross Domestic Product (GDP), Nigeria’s infrastructure stock is still a far cry from the 70 per cent of GDP internationally recommended.

Hence, the 2014 National Integrated Infrastructure Master Plan (NIMP) estimates a yearly investment of $100 billion or a total spending outlay of $3 trillion over 30 years to bridge the country’s infrastructure gap.

The plan had estimated that Nigeria would spend a yearly average of $33 billion on infrastructure between 2014 and 2018 for a modest start of the make-up investment programme. The plan envisaged that Nigeria would need to increase its infrastructure funding to seven per cent of GDP to stand a chance of bridging the historical gap. But like most national plans, the implementation remains a challenge.

Earlier in the year, the dream of scaling up infrastructure spending outlay received fresh attention with the launch of the N15-trillion Infrastructural Corporation of Nigeria Limited (InfraCo).

Vice President Yemi Osinbajo is hopeful the InfraCo, which is seeking N15 trillion funding in addition to N1 trillion equity contribution of the Central Bank of Nigeria, the African Finance Corporation (AFC), and the Nigeria Sovereign Investment Authority (NSIA) will address the infrastructure needs of the country.

“We believe that with the credibility of the actors that rally the CBN, NSIA, AFC and the quantum of resources that would be deployed, the InfraCo will make a major contribution to meeting the infrastructural needs of the Nigerian economy while promoting public-private partnership,” the VP said at a forum of the Bureau of Public Enterprises (BPE) and the Nigerian Export Promotion Council.

As it takes off, the behemoth is facilitating an initial funding of N170 billion for the Lagos-Ibadan expressway, Abuja-Kano Road and the second Niger bridge, projects the CBN Governor, Godwin Emefiele, told the media, are economically viable and would be tolled when completed.

Indeed, InfraCo has raised the dying hope in giving life to Nigeria’s key infrastructure. But with its operation driven by the Federal Government, its coming may not be the end the search for a workable funding model for dilapidated and limited state physical infrastructure. Over the years, state governments have gambled with different funding options – from equity, commercial loans, foreign debt to bond issuance – to build infrastructure.

The first option, of course, is the cheapest and safest. But no single state has the capacity to bring its infrastructure to the standard required to support inclusive economic growth with its revenue. Last year’s total internally generated revenues (IGRs) of all the states and the Federal Capital Territory (FCT) were N1.3 trillion. The figure is 42 per cent of recurrent expenditure of the states, which a previous report by The Guardian estimated at N3.1 trillion. The recurrent expenditure is about N.5 trillion less than the reported N3.6 total revenue of the states last year, suggesting that if their revenue profile is constant, it can barely meet their overheads and salaries.

This makes the cheapest choice unaffordable for most states even though it is the most appropriate for political entities with heavy debt overhang. At the close of last year, debt to revenues of the states was 170 per cent while debt to IGRs was 460 per cent. Yet, experts do not consider underfunding of infrastructure as an alternative to debt reduction.

States have had to source for short-term commercial loans to fund infrastructure projects with long-term revenue projects. This sometimes results in financial crises as experienced by many states where sitting governors had to call out their predecessor for leaving behind huge debts incurred from banks.

Volatile and risky exchange rate in external loans also come in handy in infrastructure funding modelling. But as explained by Emefiele at the 2021 Retreat of Bankers’ Committee, it is risky to depend on external loans for projects whose revenues will come in local currency.

While many states are seeking an appropriate option for funding their infrastructure needs, Lagos State Government recently closed bids for its N125 billion 10-year bond at N137.3 billion. The state set out to raise N125 billion from the capital market under its N500 billion bond programme, but the offer was oversubscribed.

The state governor, Babajide Sanwo-Olu described the “strong response” as a demonstration of investors’ confidence in the State’s ability to deliver on its infrastructural and socio-economic developmental objectives and meet its repayment obligations.

“We set out to raise N125 billion, but we closed the book with bids totalling N137.3 billion. This is a strong response from the investing community to our administration’s debut bond issuance. This humbling achievement is a testament to continued investors’ confidence in the State’s ability to deliver on its infrastructural and socio-economic developmental objectives, and to meet repayment obligations.

“In line with our vision to build a Greater Lagos, proceeds from this bond will be used to finance infrastructure projects, primarily in roads, environment and healthcare. These projects include the 10-km Regional Road in Eti Osa, six-lane Lekki-Epe Expressway, Ijedodo Road in Alimosho and Oba Sekumade Road in Ikorodu. These will contribute to a better quality of living for our people, while also creating a more enabling environment for commercial and economic activity,” Sanwo-Olu said.

The governor said the flagship projects would contribute to a better quality of living for the residents while also creating a more enabling environment for commercial and economic activities, stressing that the state had achieved a “milestone adding in the domestic debt capital markets, with the issuance of the largest bond ever by a sub-national government in Nigeria”.

He disclosed the multiplier effects of the socio-economic activities felt from the previous intervention capital raised, which justified investment in critical sectors. According to him, Lagos had maintained high discipline on the size and pricing of its bonds.

The bids which opened in April received 319 bids with a total value of N146.328 billion value. But the state government explained that N137.328 billion qualified under the terms of the offer at the clearing price of 13 per cent per annum.

“In April 2021, we accelerated an ongoing conversation on the need to quickly intervene on the huge infrastructure gap in the face of limited financial resources. We took advantage of the favourable investment climate in the capital market to initiate a bridge to finance transactions by redeeming and refinancing the existing bonds

“It is fulfilling to note that despite the hurdles that were faced, we have been able to achieve the target we set for ourselves. We exceeded the target. Many thanks to Mr. Governor for his timely intervention at different phases. This is undoubtedly another momentous transaction for Lagos,” the state’s Commissioner for Finance, Rabiu Olowo, noted.

Lagos has the brightest shot at funding its growth agenda through equity. Last year, its IGR was 32 per cent of about one-third of the entire N1.3 trillion generated by the 36 states and FCT. With firm control of the country’s economy, up to 25 per cent of the GDP, there is no doubt it has the most buoyant economy.

Yet, its yearly revenue pans into insignificance when weighed against the pressure on its resources, a reason some stakeholders have canvassed the creation of special status for the state, which inherits the failings of its peers across the country.

Historically, the state has the highest net-migration rate across the country. With insecurity reaching a new height in different parts of the country, especially the north, there are concerns that the immigration rate may have ballooned to a frightening level, with dire consequences for the public infrastructure. The fast-growing population is what many have described as a good problem. It calls for more infrastructure, in terms of both quality and quantity. Perhaps, the good news is that it has a comparatively shorter payback period of public infrastructure (compared with other states) as demonstrated by the public transportation programme of the state.

Certainly, the meagre resources of states cannot fund the huge infrastructure needs. States cannot also afford additional debts to finance white elephant projects. But the Lagos State Government bond model is a working template for states with viable infrastructural projects as another year begins in a few days.