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NEW APPROACHES TO
PROJECT & TRADE FINANCE
by
Engr. Mansur Ahmed
AGENDA
• Introduction
– Nature of Infrastructure and its financing
– Nigeria‟s Infrastructure Deficit
– Need for Alternative Financing
– The PPP Imperative
• Infrastructure Development through PPP
• The PPP Project Financing Process
• Nigeria PPP Framework
• Challenges of Global Economic Crises
• PPP Project Financing
• Conclusion
NATURE OF INFRASTRUCTURE
• Infrastructure refers to those physical structures that facilitate the
production of goods and services, without themselves being part of
the production process. Often referred to as the „stock of capital
goods‟, they include highways, airports, harbors, utility production
and distributive systems, water and sewer systems, communication
networks and energy networks
• Infrastructure projects are lumpy, meaning that they are large,
immobile, space specific and long lasting, often with life span
measures in decades and centuries, and construction often running
into years. The implication for financing is that:
– First, infrastructure finance tends to have maturities of between 5 years
to 40 years.
– Second, the initial financial outlay tends to be quite large.
– Third, as large amounts of money are typically invested for long periods,
it is not surprising that the underlying risks are also quite high.
– Last, real return on investment usually fixed and as low as near zero,
although still positive.
NIGERIA‟S INFRASTRUCTURE DEFICIT
• Nigeria has huge Infrastructure deficit. $12b to
$15b:required annually for the next 5 to 6 years
• FGN‟s annual Capital Budget can only cover a
fraction.
• There is also a severe limitation in Capacity for
project development, management, operations and
maintenance.
• Therefore, resort to Private Sector inevitable if we
are to attain Vision 2020 aspirations.
INFRASTRUCTURE DEVELOPMENT IN
NIGERIA - NEED FOR ALTERNATIVE FINANCING
• Traditionally, government has been the sole financier of
infrastructure projects, often taking responsibility for
implementation, operations and maintenance as well.
• However, rapidly declining financial resources make the option of
capital infusion through the fiscal budget to rehabilitate, replace
instead of maintaining infrastructure less feasible, thereby
accelerating infrastructure deterioration.
• Funding of infrastructure through budgetary allocation is volatile
and rarely meet crucial infrastructure expenditure requirements in a
timely and adequate manner.
• In times of financial crises, capital budgets receive a larger brunt of
fiscal retrenchment
• The greater the potential for mismanagement for this type of
government expenditure, the lower the quantity and quality of
infrastructure.
INFRASTRUCTURE DEVELOPMENT IN
NIGERIA - THE PPP IMPERATIVE
• Nigeria is in a hurry to develop.
• The criteria for meeting the need of modern,
efficient infrastructure that delivers cost
effective public services for sustained
economic growth, include:
Adequate and sustainable funding
Accelerated infrastructure provision
Faster implementation of projects
Reduced whole life cost of projects
Better and sustainable incentive for service delivery
Public Private Partnerships has proven to be
the best strategy.
INFRASTRUCTURE DEVELOPMENT IN NIGERIA
THROUGH PPP
Public Private Partnerships- Definitions
• “The design, build, finance and operation, by the private sector,
of assets and services that the government has traditionally
procured and provided to the community and which have
previously been funded by taxpayers. In return, the private
sector generates revenue either from the levying of tariffs on
users or the receipt of periodic service payments from the
government over the life of the PPP agreement”
KPMG.
• It is therefore a co-operative venture for the provision of
infrastructure or services, built on the expertise of each partner
that best meets clearly defined public needs, through the most
appropriate allocation of resources, risks, and rewards. The
public sector maintains ownership, oversight and quality
assessment role, while the private sector is more closely
involved in the actual delivery of the service or project.
STRUCTURE OF PPP PROJECT
Public Sector Public Agency
Authority Consultant
Advice
Public Sector
PPP Contract
Private Sector
Construction Contractor Advice
SPV’s Consultant
Construction
Agreement
Consortium
(Special Purpose Debt Finance Debt Provider
Vehicle)
Facility Equity Finance
Facilities Management Management
Operator Contract Construction Investor
Facilities Management
Investor
Third Party Equity
Investor
Operation Finance
THE PPP PROCESS-1
The following cycle typifies public private partnership arrangement for
infrastructure procurement.
Preliminary Stage
•Transport Policy
Project Identification
•Institutional framework
•Legal Framework
Project Appraisal
Design & Agreement
Procurement
Implementation
THE PPP PROCESS-2
NIGERIA‟S PPP FRAMEWORK
ESSENTIAL ENVIRONMENT FOR PPP
• Legal and Regulatory Framework.
• Policy and Institutional Framework.
• Availability of long-term and flexible credit.
• Strong competitive market for PPP projects.
• Sustained flow of pipeline projects.
• Capacity for project design, implementation
and monitoring.
NIGERIA‟S PPP FRAMEWORK
• Legal and Regulatory Framework
provided by the ICRC Act 2005:
– MDAs may enter into a contract with or grant
concession to any duly pre-qualified private sector
proponent for the financing, construction, operation,
and maintenance of any infrastructure that is
financially viable or any development facility of the
Federal Government. (Section 1.1).
– Establishment of the Infrastructure Concession
Regulatory Commission. (Sec 14. 1)
NIGERIA‟S PPP FRAMEWORK
• Legal and Regulatory Framework provided by the
ICRC Act 2005 (Contd):
– Functions and powers of the Commission (Section 19)
• Provides general policy guidelines, rules and
regulations.
• Take custody of every concession agreement.
• Ensure efficient execution of any concession
agreement or contract entered by the Federal
Government.
NATIONAL POLICY ON PPP
• Government Commitment
• Policy Objectives
– Economic
– Social
– Environmental
• Enabling institutional environment
– Guidelines for the PPP
– Coordination and planning
– Capacity building
– Effective communication
– Roles and responsibilities
– Market development
– Collaboration with states and other stakeholders
NIGERIA‟S PPP FRAMEWORK
ROLE OF ICRC
• The roles envisaged by the policy and
enabling laws for the ICRC are those
of:
• the PPP Resource Center;
• Contract Monitoring; and
• Policy Formulation.
NIGERIA‟S PPP FRAMEWORK
ROLE OF ICRC
• PPP Resource Centre
– Disseminate guidance, best practice
– Communicate plans / policies to private sector
– Coordinate PPP activity across Federation
• Standardise where possible
• Manage flow of projects to market
– Centre of technical expertise for MDAs/States
• procurement/negotiation, contract/banking law,
land/planning, financial intermediation
– Overcome internal barriers eg tax law
– Maintain project database
NIGERIA‟S PPP FRAMEWORK
ROLE OF ICRC
• Contract monitoring unit
– Take custody of agreements
– Monitor implementation
– Oversight of existing concessions as necessary
• Board will oversee both functions
– Recommend policies to FEC
– Propose legislative changes
– Advise FEC on project approval
– Annual report and accounts
ICRC KEY ACTIVITIES
• Streamline and standardize the process involving
PPPs.
• Draft policies, guidelines and procedures to ensure
that PPP transactions are carried out in an eminently
controlled manner by all MDAs are being developed
and will be circulated to the MDAs for review and
comments. Once finalized, ICRC will ensure all MDAs
comply with these procedures before approval is
given;
• Review of all projects identified by the MDAs and
their structure before presentation to the FEC for
approval;
• Review of contract documents before they are
signed;
• Coordinate PPP activities across the country and
manage the timing and flow of projects to the
market;
ICRC KEY ACTIVITIES
Others are to:
• Provide technical expertise to MDAs and state
governments in their procurement transactions,
and provide support during negotiations, contract
drafting, and financial mediation;
• Ensure that adequate capacity for entering, and
carrying out PPP projects on the basis of best
practices exists both in the MDAs and the
Commission itself;
• Review and monitor the tendering process;
• Harmonize the PPP process with other agencies
such as the Ministry of Finance, National Planning
Commission, Budget Office, and the like;
• Take custody of every concession agreement,
maintain a project register and ensure that they
are implemented in accordance with the law.
CHALLENGES OF GLOBAL CRISES
• Global credit squeeze affects
PPP in 3 major ways:
• New PPPs
• Cash flows and viability of existing
PPPs
• Refinancing of existing PPPs.
PPP PROJECT FINANCING
• Bank credit is only but one mode of finance
• Other Financing Methods
● Export Credit Finance
● Project Bond
● Public Finance
● Guarantees or Credit Enhancement
Schemes
● Bond Financing
• Institutional arrangements
• Enhancing the operating environment for
PPPs
PPP PROJECT FINANCING
Institutional arrangements
• Introducing special provisions (legislative amendments) to
get round the problems with the financial markets, and
make the investment environment more conducive to use
PPPs for much of the infrastructure spending. For example:
● Government guarantee for all bank loans taken out by a
PPP;
● Introducing various amendments to existing laws in the
Nigerian legislature introduced various amendments to
existing laws, intended to make PPPs more viable
through such measures as special tax allowances,
allowing the government to advance to a bank a large
portion of the loan required by the private partner;
PPP PROJECT FINANCING
Institutional arrangements (Contd)
• Allowing PPPs to be signed on the basis of „adjustable
financing‟, without finalizing a deal with banks, so that
it can proceed on the basis of government advances
while waiting for improved conditions in the financial
market.
Enhancing the operating environment for PPPs
• Establishing (Infrastructure bank) or allowing a state-
owned financial body (Bank of Industry) raise tax-free
bonds to help fund projects.
CONCLUSION-1
• In these times of global credit crunch, bank credit, a
major source of project finance, could be stepped
down in preference to such other cheaper sources as
Export Credit Finance, project bonds, government
bonds and public finance, together with various forms
of guarantees and credit enhancements could be
deployed for finance of PPP projects.
• In addition, our legislature could introduce special
provisions and incentives to get round the problems
with the financial markets.
CONCLUSION-2
• Into the bargain, the government could augment funds
from the private financial sector by allowing a state-
owned financial body such as BOI to fund
infrastructure.
• Even in an environment of easy and cheap credit from
the private financial sector, the above measures are
still necessary, as they will provide greater confidence
in the market and unfettered infrastructure
development through PPPs.
THANK YOU
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