Pushing the Boundary in Private Participation in Infrastructure(PPI): the InfraCredit Case
In 2015 the National Integrated Infrastructure Master Plan (NIIMP) estimated that the investment needed to meet current infrastructure deficit in Nigeria will amount to about USD 3.0 trillion over the next 30 years. The NIIMP estimates that annual investments in infrastructure would have to rise from the current USD 9-10 billion (about two percent of GDP) per year to an average of USD 33.2 billion for the medium term. In addition to domestic financing by the government at all tiers through budgetary allocation, the size of additional investment needed to make-up for the shortfall is expected to come from the private sector and PPPs. The emphasize of the NIIMP was on Public-Private partnerships (PPPs). The Plan also discussed extensively, a number of strategies needed to ensure private sector participation in infrastructure development in Nigeria. Of particular importance is the mention in the plan about how government can overcome the challenge in its financing approach by leveraging on debt, the Sovereign Wealth Fund, public pension funds, and PPPs. Less than two years after that plan was made public, a company is helping to put the plans of the government to action by providing local currency guarantees to enhance infrastructure financing in a wide range of sectors in Nigeria. In the following paragraphs, I provide a brief description of how this journey began.
Despite the well-known potentials for long-tenor financial support to infrastructure development with its huge assets of over NGN7tn (approximately $20bn), Nigeria’s pensions sector investment in infrastructure-linked bonds has not been successful due to lack of precedent and deficient credit quality gratifying enough for potential investors. This jinx was broken when in 2011 GuarantCo, a financial company that provides credit guarantees to enable infrastructure projects to raise debt finance, provided credit enhancement for a corporate bond issued by Tower Aluminium (a pioneering leader in aluminum products in Nigeria and in West Africa). By this gesture, Tower’s bond issue had become eligible for pension fund investment as GuarantCo had credit enhanced Tower’s bond issue by leveraging on its (i.e GuarantCo) AAA credit rating.
Following the above success, GuarantCo moved on to replicate this success on a wider scale. Through a collaboration with Technical Assistance Facility (TAF), GuarantCo moved on to establish the Nigerian Infrastructure Credit Enhancement Facility, InfraCredit, after an extended deliberation with the Nigerian Sovereign Investment Authority (NSIA). The establishment came after GuarantCo and TAF had provided technical assistance to the Nigerian Securities & Exchange Commission (NSEC) and National Pension Commission (NPC), bringing both entities to work closely with the NSIA. InfraCredit was designed to provide local currency guarantees for corporate and project bonds issued by entities across a range of sectors. The establishment of InfraCredit is helping to mitigate the uncertainties surrounding long-term infrastructure finance, and especially exchange rate fluctuations which characterize dollar-denominated loans from international banks.
To kick-start operations, GuarantCo committed NGN15bn ($50m) to InfraCredit via a Callable Capital Funding Facility Agreement, while NSIA followed suit by providing NGN7.5bn ($25m) of paid-in equity. Not long after then the Africa Finance Corporation had expression of interest to invest a further NGN7.5bn ($25m) of paid-in equity alongside NSIA.
In a volatile system as that of Nigeria, the InfraCredit provides irresistible guarantees to all involved parties in any infrastructure project. InfraCredit provides irrevocable and unconditional guarantee (and waives all defenses, including fraud) which allows the guarantor to step into the shoes of the issuer by guaranteeing payments in accordance with the original transaction schedule on a timely basis under a Deed of Guarantee entered into between InfraCredit and the Trustee. This guarantee is secured with a right to reimbursement of any amount paid against the Issuer under a Recourse Agreement between InfraCredit and the Issuer; and further secured with a first fixed charge (legal mortgage) on specific property/assets of the Issuer, and/or a first floating charge over the rest of its assets under a Security Deed (or Security Sharing Agreement and/or Intercreditor Deed).
It is expected that other organizations or individuals in Nigeria can leverage the experience of InfraCredit to overcome the prevailing constraints and unlock financing for infrastructure through the use of credit enhancement tools, or a host of other tools.