MOBILISING FINANCE FOR INFRASTRUCTURE A STUDY FOR THE UK DEPARTMENT FOR INTERNATIONAL DEVELOPMENT (DFID) August 2015 Nigeria country case study Produced by: Cambridge Economic Policy Associates Ltd. i ACKNOWLEDGEMENTS This country report was produced by Cambridge Economic Policy Associates Ltd (CEPA) as part of research funded by the Department For International Development (DFID): Mobilising Finance for Infrastructure in Sub-Saharan Africa and South Asia. The views expressed within it are those of CEPA and do not represent DFID's own policies or views. Any discussion of the content should therefore be addressed to the authors and not to DFID. CEPA is grateful for comments on the research from Lily Ryan-Collins, Phil Outram, Andrew Maclean, Fernanda Ruiz- Nuñez, Fiona Stewart, Sameh Shenouda, Euan Marshall, Jay Koh, Brian Baxendale, Soumen Bagchi, Steven Lee, Sergio Dista and Paolo Craviolatti. In addition, the overall research project has benefited from consultations with a wide number of stakeholders based across Sub Saharan Africa, India and elsewhere. CEPA would like to thank all consultees for their contributions to the report. ii CONTENTS ACKNOWLEDGEMENTS ..................................................................................................... ii Executive summary ........................................................................................................... i 1. Introduction .............................................................................................................. 1 2. The history of private financing in Nigeria ................................................................. 2 2.1. Development of the investment framework ............................................................. 2 3. Analysis of PPP transactions by sector ....................................................................... 4 3.1. Energy ........................................................................................................................ 4 3.2. Transport .................................................................................................................... 7 3.3. Water and sanitation ............................................................................................... 11 4. Barriers to investability / bankability ....................................................................... 12 4.1. Supply of bankable projects ..................................................................................... 12 5. Availability of sources of finance ............................................................................. 17 5.1. Pension funds ........................................................................................................... 17 5.2. Sovereign Wealth Fund ............................................................................................ 19 5.3. Nigerian Bank of Industry ........................................................................................ 19 5.4. Commercial banks .................................................................................................... 20 5.5. State government infrastructure bonds .................................................................. 20 5.6. International investors ............................................................................................. 23 5.7. DFIs and development partners .............................................................................. 23 6. Overall conclusions on key constraints to private financing of infrastructure ........... 24 iii ACRONYMS AfDB African Development Bank AIIM African Infrastructure Investment Managers AIIF Africa Infrastructure Investment Fund ARM Asset & Resource Management Co Ltd BoI Bank of Industry BOOT Build-Own-Operate-Transfer BOT Build Operate and Transfer BPE Bureau of Public Enterprises CBN Central Bank of Nigeria CDC UK Development Finance Institution DEG German Development Finance Institution (subsidiary of KfW) DFI Development Finance Institution DFID Department for International Development DISCOS Electricity Distribution Companies DMBs Deposit Money Banks EAIF Emerging Africa Infrastructure Fund EPSRA Electric Power Sector Reform Act FERMA Federal Roads Maintenance Agency FMO Netherlands Development Finance Institution GDP Gross Domestic Product GENCOS Electricity Generation companies ICRC Infrastructure Concession Regulatory Commission IFC International Finance Corporation IPP Independent Power Producer KfW German Development Finance Institution LCC Lekki Concession Company LSE London Stock Exchange MMA2 Murtala-Muhammed Airport MDAs Ministries, Departments and Agencies MYTO Multi-Year Tariff Order iv NBET Nigeria Bulk Energy Trading Co NEPA National Electric Power Authority NERC Nigerian Electricity Regulatory Commission NGN Nigerian Naira NIAF Nigeria Infrastructure Advisory Facility NI-IMP National Integrated Infrastructure Master Plan NRC Nigerian Railway Corporation NSIA Nigeria Sovereign Investment Authority OPIC Overseas Private Investment Corporation PAIF Power and Airline Intervention Fund PENCOM National Pension Committee PHCN Power Holding Company of Nigeria PPA Power Purchase Agreements PPP Public Private Partnerships PRG Partial Risk Guarantee v EXECUTIVE SUMMARY This report was produced by Cambridge Economic Policy Associates (CEPA) as part of a wide-ranging research programme funded by the Department for International Development (DFID) that explores the factors constraining the provision of private finance to support infrastructure investment in DFID’s focus countries. This report provides an overview of the market for infrastructure finance in Nigeria (focusing on economic infrastructure sectors: energy, transport and water) using evidence gained from sixteen consultations held with stakeholders (in the period December 2014 to February 2015) and complementary desk-based research. The study provides background on the key policy reforms implemented by the government of Nigeria in an attempt to provide a framework more conducive for private finance; an overview of the main transactions that have taken place across the different infrastructure sectors; and then sets out the findings on the main factors constraining increased private finance for infrastructure drawing largely on the views of stakeholders. The findings of the analysis are summarised below. Status of reforms and private finance transactions by sector For each of the main economic infrastructure sectors, the research reviewed the extent to which the different sectors have been able to attract private finance. Figure ES.1 gives a summary overview of the different sectors, while Figure ES.2 provides examples of some of the projects that have been able to attract private finance across the different sectors. It is worth highlighting that with the exception of the telecoms sector, there has been quite limited progress in attracting private finance; overall there remains a reliance on the provision of finance by DFIs and/ or the use of government/ development partner guarantees for deals involving the private sector to go through. i Figure ES.1: Summary of progress in attracting private finance in economic infrastructure sectors ii Figure ES.2: Examples of infrastructure projects that have received private finance iii Although some progress has been made in attracting private finance in the telecoms sector; there is still a considerable financing need in the other economic infrastructure sectors. This report also focused on providing some evidence on the main factors constraining the increased provision of private finance to those sectors. The findings from the consultations were that the constraints are due mainly to a combination of political economy and macroeconomic constraints. There are also issues related to the technical and financial capacity to develop projects and also the availability of finance, but these are second order constraints. Political economy constraints Market participants have limited confidence in their ability to enter into sustainable long-term agreements with the government because of the nature of the political risks involved. Fundamentally this is because Nigeria has no track-record of being able to manage the politically powerful self- interested individuals that have undermined efforts to attract increased private investment in infrastructure. Specific risks highlighted include: The risk of policy reversal caused by a change in government and also a change of ministers within government. Uncertainty about the ability of government departments to enforce existing policies/ laws related to private investment in infrastructure. Disputes between state and federal government about projects that create additional uncertainty. Concerns about the role of the judiciary and its understanding of the requirements of the infrastructure sector. Macroeconomic constraints Macroeconomic instability in Nigeria is the other key factor that is constraining the provision of private finance for infrastructure. The main issue is that government debt provides investors a relatively risk- free high yielding investment option that is far more attractive than the option of investing in risky infrastructure projects; effectively crowding-out private finance. In addition the continued prevalence of double digit inflation, high interest rates for loans and low saving deposit rates creates an economy with a limited pool of long-term deposits that can be used to enable the provision of long-term local currency debt