Leveraging the capital market & private sector to bridge Nigeria’s infrastructure gap

Infrastructure development is undoubtedly critical for a country’s long-term economic growth and competitiveness as it impacts economic activities by increasing productivity, facilitating trade, and promoting innovation. In Nigeria, the huge infrastructural deficit which has been a recurrent conversation remains a major impediment to economic growth and the ease of doing business in the country.

According to the International Monetary Fund in its “Technical Assistance Report -Additional Spending toward Sustainable Development Goals” completed in April 2020, Nigeria must invest at least 18.1 percent of GDP in infrastructural development by 2030 to raise living standards.

Meanwhile, the Minister of Finance, Budget, and National Planning, Zainab Ahmed, said the federal government will require about $100 billion annually for the next 30 years to effectively tackle Nigeria’s infrastructure challenges. The minister further explained that with a total federal budget of less than $30 billion for 2019 and the dependency of Nigeria’s income on oil revenue with unpredictable global price fluctuation, Nigeria no doubt lacks the fiscal space to self-finance the required infrastructure investment. Minister Ahmed said the time had come for the government to start looking for alternative sources of financing infrastructure as budgetary funding alone could not address the deficit. Capital expenditure in 2018 stood at N1.03 trillion (according to the Central Bank of Nigeria), below the budgeted sum of N2.87 trillion.

Having said that, the question that is yet to be answered is how the infrastructure deficit will be funded. Although there have been different suggestions, the most feasible are leveraging the capital market and the private sector. Infrastructure financing is long-term financing and requires huge capital, as such, sophisticated investors are required to achieve such financing and this includes investors in the capital market as well as private investors. The capital market is critical to financing infrastructure due to its ease to access capital. When individual investors are involved, the instruments to achieve adequate financing have to be complex enough to meet the needs of the infrastructure project.

Going through the capital market would mean that the government should consider resorting to bonds rather than loans, as structuring all transactions in a local currency, rather than dollars, would help to drive infrastructural development at a greater speed. The capital market could go a long way in driving this development as investors are ready and willing to put money into instruments that ensure that the transactions are bankable, and the costs reflect reality. This is where the importance of infrastructure bond market development comes to the fore as bonds are the go-to investment option for financing infrastructure projects in the capital market.

The government could give a sovereign guarantee to make the bond sustainable or have a development finance institution to encourage participation and enhance investor confidence. Deepening the capital markets or creating additional liquidity by increasing equity and debt capital market thresholds for pension funds is also important as Pension Fund Administrators have huge monies sitting in banks or other fixed income investments.

Funding infrastructure through the private sector is also a great option as investors in that space are more likely to execute projects successfully as they have more to lose. Private sector participation ensures professionalism and accountability, which enhances investor confidence. Creating a strong framework for private sector investments through publicprivate partnership remains the most costeffective means of bridging the infrastructure deficit in the country. A proper public-private partnership arrangement would also save the government the huge borrowing costs and stave off further pressure on the already high debt servicing ratio.

Having said that, to drive infrastructural development in Nigeria, the government would start by creating an enabling environment and improved business climate e.g. For the power sector - deregulation on transmission, for roads, bridges - reintroduce tolling and make the bidding process open and competitive. Fiscal and monetary policies must align with and support the investment horizon of projects. For instance, if the Federal Government is embarking on expansionary fiscal policies to stimulate growth, the Central Bank of Nigeria should be doing the same, both need to work in tandem. The Apex Bank and Regulators also need to do a lot more for financial inclusion as this would make more financial instruments available, thus expanding the capital market to reach investors both on the local and external front.

As a country, we need to start looking inwards for financing, we should build capacity in the country to be able to fund themselves rather than depending on foreign investors. With a well-developed infrastructure, Nigeria would experience a boost in financial inclusion, improvement in the balance of trade, greater production competitiveness, enhanced housing, and robust pensions among other benefits. However, leveraging the capital market and private sector to bridge the infrastructure gap in Nigeria should be done simultaneously and not one after the other.