Beyond the ICRC - Infrastructure Concessions and Investing in Nigeria

It is longer news that the Federal Government has appointed a high powered board (under the chairmanship of former Head of State: Chief Ernest Shonekan) to oversee the Infrastructure Concession Regulatory Commission (ICRC). The ICRC, established in 2005, is charged with creating and managing a framework for regulation of Public Private Partnerships (PPP) in Infrastructure Development in Nigeria. While the fact that we must - as a country - make significant investments to improve our dilapidated infrastructure is not in doubt, what remains to be substantiated is the level of our preparedness to embrace Infrastructure Concessions and investing in this country.Infrastructure concessions have become an increasingly important activity the world over, with infrastructure rapidly attaining the status of an asset class in which specialised firms such as Macquarie and Babcock & Brown (both Australian companies) have built time-tested profitable business models. Infrastructure concessions cut across a wide cross-section, ranging from: Toll roads, to airports & seaports to electricity projects and even waste management. Despite this broad spectrum of activities which may be classified as infrastructure investing, most successful infrastructure regimes share similar characteristics (which I attempt to describe below).

Infrastructure concessions are highly dependent on strong contractual, and stable political, frameworks, this is due to their capital intensive nature and standard lengths of concession (not usually less than 30 years, often extending to 90 years or more). Concessionaires not only need to enter into binding contractual agreements with the relevant authorities, they must also be confident in the ability of the concessions they have received to withstand changes in governments and political alignments. Nigeria's recent history of reversed privatisations and concessions (the Abuja Airport transaction is a good case study!) is very discouraging and doesnt signify the willingness and/or enthusiasm with honouring agreements (contractual or gentlemanly) which may have been entered into between investors and previous governments. Therefore, for us to begin to contemplate raising serious money for our PPP initiatives , the government has to display a greater willingness to honour and abide with convenants already agreed to and prove its commitment to a stable polity.

An equally important "ingredient" for successful Infrastructure Concessions is the depth and sophistication of domestic financial markets. Infrastructure projects (such as Toll roads, power plants and rail lines) are capital intensive projects with long gestation periods and as such they depend on access to long-dated financing arrangements. Most of the infrastructure projects originated by Macquarie Bank (probabaly the biggest firm in the infrastructure asset class) are sold and passed on to dedicated infrastructure funds (both listed and unlisted) that it manages. Furthermore, the firm routinely has access to long term bank financing with various lenders advancing loans with tenors up to 30 years to augment its equity contribution. In the case of Nigeria, two (2) quick questions come to mind: 1. Do we have investors with the competence, capacity and appetite to invest equity in infrastructure projects?; and 2. where are the sources of long term debt financing which will enable project sponsors complete their deals. The longest-dated bank financing in Nigeria - at least that I have heard of - is the 12-Year term loan given to the Lekki Concession Company - developer and operator of the Lekki Toll Road, the first toll road in Nigeria - by First Bank and UBA. A 12-Year term loan is a significant development in Nigeria (at least given where we are coming from) but it will be barely scratching the surface if bigger projects such as the Port Harcourt-Maiduguri rail line and the Lagos-Ibadan expressway are to be developed by the Private Sector. It is clear that for Infrastructure Concessions to take off and become serious business in Nigeria, we must begin to put structures in place to mobilise private capital (in the form of debt and equity) for executing various infrastructure projects.

Despite the obvious limitations cited above, I am of the opinion that - once proper structures are put in place - infrastructure investing has a bright future in Nigeria. The opportunities are so great (to the point of being limitless) due to our very low development base. The electricity situation in Nigeria is so bad and demand so far outstrips supply that almost any business model
for generating and/or distributing electric has a high chance of returning a profit to its sponsors. The same idea applies to investing in urban transportation, the proposed Red and Blue lines up for concession by the Lagos State Government will serve such an obvious need that I wonder how concessionaires operating these railway lines will lose money. If the Government backs up its talk with action and the proper incentives, infrastructure concessioning may turn out to be the "silver bullet" (if any exists!) which we have been seeking to our currently dreadful infrastructure situation.