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FINANCING INFRASTRUCTURE THROUGH THE CAPITAL MARKET

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Presentation on theme: "FINANCING INFRASTRUCTURE THROUGH THE CAPITAL MARKET"— Presentation transcript:

1 FINANCING INFRASTRUCTURE THROUGH THE CAPITAL MARKET
Presentation at the Infrastructure Roundtable Organised by the Securities and Exchange Commission (SEC) in collaboration with the National Planning Commission (NPC) By Dr. Shamsuddeen Usman, CON Hon. Minister/Deputy Chairman National Planning Commission The Presidency Monday, August 5, 2013

2 Outline 1.0 Introduction 2.0 Nigeria’s Current State of Infrastructure
3.0 The Place of Infrastructure in Nigeria’s Strategic Planning Framework 4.0 Overview of National Integrated Infrastructure Master Plan (NIIMP) - Key Objectives - National Targets and Investment Requirements - Sectoral Targets and Investment Needs 5.0 Financing Options for Infrastructure Development in Nigeria - Lessons from other Countries

3 Outline 6.0 Relevance of Capital Market to Infrastructure Development
7.0 Key Issues and Challenges 8.0 Strategies for Enhanced Infrastructure Financing through the Capital Market

4 1.0 Introduction Infrastructure is a key driver of economic growth and
development Serves as an enabler of business competitiveness Despite huge oil revenues over the years, Nigeria’s infrastructure stock remains grossly inadequate Serious constraint to socio-economic development - Recent World Bank survey reveals that 53% of challenges faced by the manufacturing sector is infrastructure-related Considerable progress made in recent times - With increased spending on infrastructure development in Nigeria

5 1.0 Introduction (Cont’d)
Purpose and theme of today’s Roundtable are appropriate - Assess the infrastructure needs of Nigeria - Explore the capital market as a source of financing infrastructure - Deliberate on what will attract investors to invest in infrastructure related instruments in Nigeria

6 2.0 Nigeria’s Current State of Infrastructure
The current state of infrastructure in Nigeria is inadequate - To drive the country’s development aspirations Stock of infrastructure remains below the international benchmark of 70% of GDP Nigeria’s core infrastructure stock is 35-40% of GDP Additionally, the lower infrastructure stock is not properly integrated - Thus the need for NIIMP to bridge the gap 1 Excludes Russia SOURCE: ITF; GWI; IHS Global Insight; McKinsey Global Institute analysis

7 2.0 Nigeria’s Current State of Infrastructure
Benchmark ~70% 35–40 Nigeria Brazil India China South Africa Indonesia Poland BRICS1 Other emerging markets 1 Excludes Russia SOURCE: ITF; GWI; IHS Global Insight; McKinsey Global Institute analysis

8 2.0 Nigeria’s Current State of Infrastructure (Cont’d)
A cross country comparison of infrastructure by sector is highlighted below: - Huge financial resources required to move Nigeria’s position to be at par with other emerging economies Country Roads per sq. km Quality of port infra-structure WEF index (1 to 7) Power Consumption kWh/capita Access to water (%) Access to sanitation (%) Mobile subscriptions per 100 people Japan 3.31 5.2 8,394 100 105 Brazil 0.21 2.7 2,384 98 79 124 Russia 0.06 3.7 6,452 97 70 179 Mexico 0.19 4.0 1,990 96 85 82 Indonesia 0.29 3.6 641 54 103 South Africa 0.30 4.7 4,803 91 127 Nigeria 3.3 136 59 31 56 Pakistan 0.34 4.1 457 92 48 62 Bangladesh 1.66 3.4 279 81 Source: AfDB’s IAP for Nigeria 2013

9 3.0 The Place of Infrastructure in Nigeria’s Strategic Planning Framework
NV20:2020 is Nigeria’s long term strategic plan - With overall objective of moving Nigeria into the league of 20 largest economies by year 2020 The Vision is anchored on 3 main pillars -Guaranteeing the productivity and well being of the people -Optimising the key sources of economic growth -Fostering sustainable social and economic development -Infrastructure is a key component The Transformation Agenda (TA) is the FG’s medium-term road-map on key polices, programmes and projects to be implemented, - Has infrastructure as a major pillar NIIMP is a framework that identifies required investment to bring infrastructure in Nigeria to desirable state Close relationship exist between the NV20:2020, the TA and NIIMP - As detailed in chart below:

10 3.0 The Place of Infrastructure in Nigeria’s Strategic Planning Framework
NIIMP is a framework that identifies required investment to bring infrastructure in Nigeria to desirable state Close relationship exists between the NV20:2020, the TA and NIIMP - As detailed in the chart below

11 3. 0 The Place of Infrastructure in Nigeria’s Strategic
3.0 The Place of Infrastructure in Nigeria’s Strategic Planning Framework (Cont’d) Nigeria Vision 20: 2020 First National Implementation Plan ( ) (2 Second National Implementation Plan ( ) Third National Implementation Plan ( ) FG Transformation Agenda ( ) NIIMP ( )

12 3.1 The Place of Infrastructure in the Transformation Agenda (TA)
Key Outcomes Jobs, Jobs, Jobs Poverty Alleviation Better Resource Management Developing Institutions Sustained Economic Development Priority Areas Good Governance Human Capital Development Infrastructure Real Sector Objectives Job Creation Strong & Inclusive Growth Well-being of Nigerians

13 3.2 The Place of Infrastructure in the NV 20:2020
NATIONAL ASPIRATIONS POLITY Peaceful, harmonious and a stable polity MACRO-ECONOMY A sound, stable and globally competitive economy with a GDP of not less than $900 billion and a per capita income of not less than $4000 per annum AGRICULTURE A modern technologically enabled agricultural sector that fully exploits the vast agricultural resources of the country, ensures national food security and contributes to foreign exchange earnings HEALTH A health sector that supports and sustains life expectancy of not less than 70 years and reduces to the barest minimum the burden of infectious and other debilitating diseases MANUFACTURING A vibrant and globally competitive manufacturing sector that contributes significantly to GDP with a manufacturing value added of not less than 40% INFRASTRUCTURE Adequate infrastructure services that support the full mobilisation of all economic sectors EDUCATION Modern and vibrant education system which provides the opportunity for maximum potential, adequate, and competent manpower

14 4. Overview of the National Integrated
4.0 Overview of the National Integrated Infrastructure Master Plan (NIIMP) The National Integrated Infrastructure Master Plan has a 30 year horizon, - 3no 10-year strategic plans - 6no 5-year operational plans Key objective of NIIMP to ensure coordinated approach to infrastructure development in Nigeria - Help to integrate diverse infrastructure plans and projects across all sectors and regions in Nigeria Other objectives are to: - Strengthen linkage between infrastructure sector components and the national economy - Review, upgrade and harmonise existing subsector master plans

15 4. Overview of the National Integrated
4.0 Overview of the National Integrated Infrastructure Master Plan (NIIMP) (Cont’d) Prioritise projects and programmes for implementation in the medium to long-term Promote private sector participation in infrastructure development Enhance performance and efficiency of the economy NIIMP also to provide the capital allocation framework for the required investments - To bring infrastructure in Nigeria in line with the country’s growth aspirations.

16 4.1National Targets and Investment Requirements
To close current infrastructure gap and reach desired optimal investment Nigeria must aggressively increase core infrastructure stock From 35-40% of GDP in 2012 to 70% by 2043 Consequent need to increase investment spending in infrastructure - Target investment requirement is approximately $2.9 trillion over next 30 years - Projected debt/GDP at % Infrastructure stock share of GDP Total spend 2014–43 USD trillions Investment over the next 30 years total US$2.9 trillion (constant 2010 prices) 35–40 Core Other Total Current spending % of GDP 2–3 1–2 3–5 Average annual spend required % of GDP Core 7 2 9 Current Target

17 4.2 Required Investment to close Nigeria’s
Infrastructure gap on average annual basis X% Share of GDP, total Average annual infrastructure spending required by Nigeria is highlighted below: Average annual spending, USD billions Required investments to close infrastructure gap 7 9 10 9 9 9 2014–18 19–23 24–28 29–33 34–38 2039–43 SOURCE: NIIMP development team

18 4.3 Sectoral Targets and Investment Needs
Sectoral targets, and investment needs for 30 year period are highlighted below: Transportation $800bn Road $350 billion Rail $75 billion Aviation $50 billion Maritime $50 billion Urban Transport $275 billion Energy $900 billion Electric Power Oil and gas ICT $300 billion access quality Agric, Water & Mining $350 billion Water $180 billion Agric $121 billion Mining $49 billion Housing $300 billion Housing Social Infrastructure $150 billion Education Healthcare

19 4.3 Sectoral Targets and Investment Needs (Cont’d)
Vital Registration and Security $50 billion Police Fire service Prisons FRSC Vital Registration

20 5. Financing Options for Infrastructure
5.0 Financing Options for Infrastructure Development in Nigeria (Cont’d) An estimated USD 2,900 billion is required for Nigeria’s infrastructure development, over the next 30 years. - USD 127 billion required over next 5 years - An average of USD 25 billion per annum from ,( compared to USD 9-10 billion currently ) Budgetary resources alone will be inadequate to meet the infrastructure requirements - At the Federal and States level Financing of infrastructure will also require private sector participation Recent privatisation trends (e.g.p ower) indicate private sector can take about 48% share Need to explore other options of financing - Including the capital market

21 5. Financing Options for Infrastructure
5.0 Financing Options for Infrastructure Development in Nigeria (Cont’d) Private sector investment requirement is projected to increase from 46% to 48% during the 1st operational plan, Public Sector investment projected at 52% - Only about 15% of public sector funding is projected to be from the Treasury - 85% to be sourced through: Bond market Other Borrowing – internal and external; etc. Public and private sector need to borrow to finance infrastructure Banking sector limitations - Nature of infrastructure finance – long-term, high initial capital requirements

22 5. Financing Options for Infrastructure
5.0 Financing Options for Infrastructure Development in Nigeria (Cont’d) Estimated Financing : Potentials Public Sector To contribute 52% of the total infrastructure investment during the first five years Amounting to about $66 billion Financing Options Four primary options available for this investment Public current account – about $36 billion Public debt – about $29 billion Other public sources (SWF & Pensions) – $8 million and $5 million respectively PPPs – $10-20 billion Private Sector Private sector currently accounts for about 46% of the infrastructure investment in Nigeria This is envisaged to increase to 48% by 2018 Due to increased private sector participation, both through PPPs & privatisation

23 5.1 Financing Options: Lessons from other Countries
S/N Strategy Purpose Best Practice Example 1 Various Intervention funds Land Fund Viability Gap Fund (VGF) Guarantee Fund Nigerian Infrastructure Development Fund Accelerate Land acquisition for PPP projects Construction cost contribution – enhance financial viability of PPP projects Provide guarantee for infrastructure risks Offer long-term, mainly local currency financing for infrastructure Indonesia Cyprus 2 Project Bond Initiatives To increase debt financing availability for large-scale infrastructure projects Target sectors like Energy, Transport and ICT European Investment Bank supporting project companies in credit enhancement 3 Loan Guarantee Instruments To support nationally significant infrastructure projects which are financially viable with equity finance but dependent on guarantee and otherwise not financeable within reasonable timeframe United Kingdom and Italy Nigeria to pass a guarantee law or be embed in the NIIMP Act.

24 5.1 Financing Options: Lessons from other Countries (Cont’d)
S/N Strategy Purpose Best Practice Example 4. Crude for infrastructure swaps To ensure expeditious delivery of key infrastructure whose financing is challenged Cyprus Indonesia 5. World Bank Partial Risk Guarantee (PRG) To protect private lenders or private sector investors against the risk of government or a government-owned entity failing to perform its contractual obligation in respect of a private project This is a Government accepted measure as of 2010 Used in Nigeria electricity sector privatisation 6. Pension funds and insurance companies To augment public sector financing shortfalls 7. Private Equity For medium level investments in infrastructure 8. Export Credit Agencies To reduce cost of capital and reduce user charges 9. Use of regulated Assets-Based Model to finance water utilities To guarantee steady yield to investors and affordable user charges United Kingdom

25 6.0 Relevance of Capital Market to Infrastructure Development
Capital market critical in mobilising and channeling medium to long-term investment funds; - Critical to any country’s growth and development Suitable for infrastructure financing Major studies have identified that viable projects collapsed due to the mismatch of funds utilised Capital market enables projects with long gestation period to raise long term funds - Through equities and bonds Facilitates the bringing together of suppliers and users of - medium to long term capital for investment in socio-economic developmental projects

26 6.0 Relevance of Capital Market to Infrastructure Development (Cont’d)
Plays a key role in the privatisation programmes - Including bank capitalisation and consolidation Provides opportunity for companies to borrow funds needed for long-term investment purposes Platform for the marketing of shares and other securities - In order to raise fresh funds for expansion - Vehicle for allocating the nations real and financial resources between various industries and companies Encourages the inflow of foreign capital when foreign companies or investors invest in domestic securities

27 6.1 Current Potential of the Nigerian Capital Market
Depth of Nigerian capital market - High potential for growth On-going Reforms in NSE - Steps being taken to enhance regulatory function of SEC - Other capital market reforms - All expected to translate into further improvement in the capital market in the near term Post Crisis (June 2013) Crisis (Dec. 2011) Pre-Crisis (June 2008) ASI 36,164.31 ASI 20,773.98 ASI 62,711.56 Total Mar. Cap N15.78 trillion Total Mar. Cap N10.28 Trillion Total Mar. Cap N15.3 trillion Equity Mar. Cap N11.8 Trillion Equity Mar. Cap N6.54 Trillion Equity Mar. Cap N11.43 Trillion Bond Mar. Cap N3.5 Trillion Bond Mar. Cap N3.74 Trillion Bond Mar. Cap N4.35 trillion Source: NSE

28 7.0 Key Isssues and Challenges
Deficiency in bond and equity market Low liquidity and depth June Dec June 2013 Market Cap/GDP Bonds ( Public Private) / GDP % % % Bonds ( public & private ) / GDP % % % Low investor and issuer base; Remaining issues in corporate governance; etc Low fiscal space for government Slower pace of financial reform in pension and insurance sectors

29 7.0 Key Isssues and Challenges
Poor regional alliance Global financial contagion – risk of external shocks Low level of credit provision to the private sector: crowding out by government debt Lack of non-government, longer-term debt instruments Inadequate competence and capacity Inadequate vehicles for infrastructure financing - Inadequate public sector capacity for PPP projects All the challenges above, represent opportunities, however.

30 8. Strategies for Enhanced Infrastructure Financing
8.0 Strategies for Enhanced Infrastructure Financing through the Capital Market Task of enhancing infrastructure financing is not responsibility of Government alone. - Capital market operators, regulators and private sector have major roles to play On the part of Government, effort is being made to ensure effective implementation of the TA and NV20:2020 - Ensuring maintenance of strong and stable macroeconomic environment - Better legal and regulatory environment On going reforms in the petroleum and power sectors Effort being made to finalise the NIIMP and ensure its effective implementation through: - Instutionalising M&E system in the public service - Initiating the process for enacting the NIIMP Act - Establishment of infrastructure delivery units in the MDAs

31 Role for private sector
8.0 Strategies for Enhanced Infrastructure Financing through the Capital Market (Cont’d) Role for private sector Develop long-term infrastructure finance capabilities - Issue bonds by tapping pension funds, insurance companies & investment trusts - PPP, Privatisation programme Imbibe corporate governance culture; - Abiding by the market rules; - Pay taxes; etc

32 Intensifying cross-listing and trading linkages Globally;
8.0 Strategies for Enhanced Infrastructure Financing through the Capital Market (Cont’d) Cooperate with Government to attract global funds and global infrastructure providers by: Intensifying cross-listing and trading linkages Globally; Harmonise practices and standards among market operators Forthcoming Nigeria – World Economic Forum Roundtable on Infrastructure – Oct 2013, Abuja

33 Thank You Thank You


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