A combination of bond issuance and Public-Private Partnership (PPP) offers strategic and operational choices to stakeholders in addressing Nigeria’s huge infrastructure gap. COLLINS NWEZE writes on the need for governments at the states and federal levels to explore either or both choices in fixing the infrastructure challenge.
For the Federal and state governments, bond seems the way to go to addresscertain problems. Many states and the Federal Government have been going to the Stock Market for bonds to take care of some of their projects, especially infrastructure development.
The African Development Bank (AfDB) says Nigeria needs $360 billion to fix infrastructure and bond issuance remains a viable option for achieving it.
Lagos State alone needs an estimated $50 billion to address its infrastructure needs in 10 years. This comes to $5 billion yearly, which is a far cry from its annual budget estimated at $3.1 billion (N497 billion).
Lagos State Finance Commissioner Ayo Gbeleyi said the existence of such funding gap made Public-Private Partnership (PPP) a welcome strategy for the government to bridge the huge infrastructure deficit.
He said the PPP option allowed the state to tap into the private sector’s capital and leverage on its managerial efficiency, technology, innovation, entrepreneurial approach and expertise.
In the FDC Economic Report, Bismark Rewane said for an economy with an estimated Gross Domestic Product (GDP) of $282 billion and a yearly GDP growth rate of about 6.8 per cent, fixing such gap would required a recourse to bond issuance (debts).
The Fiscal Responsibility Act of 2007 set a 40 per cent ceiling for Nigeria’s public debt to GDP and the International Monetary Fund (IMF) raised the threshold to 56 per cent in 2013.
However, Rewane said the establishment of a debt ceiling is arbitrary at best since there are many variables that should determine optimal debt level that are not included in determining the ceiling.
“Since the economic well-being of a country should be seen through the prism of a sound business entity, there ought to be a distinction between “bad debt run up” and “good debt build up,” he said.
AfDB’s perspective
According to the AfDB, improving Nigeria’s infrastructure could boost the country’s GDP by about four per cent. Some of the sectors that require attention include power, road, rail, information communications technology (ICT) and transportation. However, access to finance, to fund the development of most of these critical sectors has remained a challenge.
According to the continental bank, Nigeria has an infrastructure deficit of about $360 billion and Islamic finance can be of great help in fixing the gap.
The bank said addressing these challenges will require a substantially larger annual level of investment in infrastructure, a significant increase in annual allocations for routine and periodic maintenance to ensure reliable infrastructure services, and increased attention to the institutional arrangements that support the infrastructure network of the country and the related services.
The Islamic model uses money as a measuring tool for value and not as an asset in itself, so income is not received from money as this is seen as exploitative and usurious. Investment vehicles through the Islamic finance structure are based on shared business risk.
The growth of Islamic finance globally also means there is an increasing demand for new ways of identifying Islamic-compliant business activities. Presently, the London Stock Exchange is working on the creation of new indices. This means the creation of a new way of identifying Islamic finance opportunities – a world-leading Islamic Market Index.
Bond option
Many analysts think Islamic finance via bonds has shown resilience despite the slowdown in the global economy and the pressure on conventional banking in Western countries.
Undeterred by the uncertain recovery elsewhere in the world’s financial markets, growth of the Islamic finance market globally has continued unabated this year. Shariah-compliant assets are estimated at upward of $1.4 trillion and are likely to sustain double-digit growth in the coming two to three years.
The Central Bank of Nigeria (CBN) guidelines on non-interest banking put the minimum capital base of N10 billion ($63.1 million) for National Islamic Banks and $31.59 million for regional Islamic banks. However, the regulator allows deposit money banks to offer non-interest banking products, using existing structure such as the branches and manpower.
The CBN said Islamic finance which has become household name in Europe and America should not be ignored.
Aside, Nigeria, global acceptance for Islamic finance is increasing by the day despite initial hitches to its survival. According to Standard & Poor’s (S&P), Islamic finance remained a demand-driven market, with scarce supply, still hampered by a limited range of Islamic financial centres and their various regulatory frameworks.
The rating agency said it believed that regulatory efforts to accommodate Islamic finance and the establishment of additional industry bodies at national levels will take center-stage starting, this year.
Nigeria’s new moves
Nigeria’s profile as Africa’s most liquid debt market after South Africa has been rising since JP Morgan and Barclays last year, included its bonds in their sovereign bond indices, encouraging greater foreign participation in its debt market. The use of Islamic finance in Africa could grow further as several north and sub-Saharan African countries including Morocco, Tunisia, South Africa and Kenya are laying the legal groundwork to be able to issue sukuk, an Islamic finance bond.
Osun State, last year floated the country’s first Islamic bond, taking a major step towards developing an Islamic finance industry in the country. Analysts said the Nigerian Sharia-compliant bond issued by the state while relatively small at $62 million, signaled the start of a trend.
The sukuk is based on an ijara structure, a common leasing arrangement in Islamic finance, which bans payment of interest. Sukuk have become an increasingly popular investment globally, particularly among cash-rich funds in the Gulf and Southeast Asia.
Also, the Islamic Development Bank is lending $150 million through Sharia-compliant facilities for the new Lekki Port in Lagos State, Nigeria. The CBN said Islamic finance products also have the capacity for ensuring financial inclusion of significant segment of the population. It stated that when properly harnessed, the system could contribute significantly in turning Nigeria into a major international financial hub.
It said Islamic finance has shown its potential in achieving financial inclusion in many economies by bringing in large under banked populations, especially Muslims into the urbanised financial sector.
According to the apex bank, “Nigeria has so far registered Jaiz bank, and has given a licence to Stanbic IBTC Bank to operate some window. Also, an approval was given to Sterling Bank to operate an Islamic window and a microfinance bank that has applied for Islamic banking licence. This is in addition to the work being done by National Insurance Commission to promote Takaful, an Islamic insurance product.”
According to the CBN, many Islamic financial markets had established their presence in all the major financial centres and were playing key roles in deepening the financial markets with products across the globe.
Chairman, Advisory Committee of Experts on Non-Interest Banking, Sterling Bank Plc, Sheik Abdulkader Thomas said deposits from non-interest banking could be deployed into infrastructure funding and other developmental projects.
Thomas, who is an American living in Kuwait, described Nigeria as a huge market for non-interest banking given its large population base. He said the banking concept is a viable means of gathering huge deposits, adding that although Nigeria’s infrastructure is seen as weakness, deposits from non-interest banking could be used to fix it.
He said: “We have to look at a country like Nigeria from a different perspective. Kuwait has small population, with very high wealth. But Nigeria has very large population. We believe that non-interest banking will be very important to gather savings from the grassroots population.”
He said the billions of dollars in the non-interest banking accounts globally, cannot find its way into Nigeria, rather, the country should generate its own funds to finance key projects and create wealth for her citizens.
President, Chartered Institute of Stockbrokers (CIS), Ariyo Olushekun said prospects for Islamic finance are very bright. He said the finance system has become necessary since a very significant proportion of the population strongly believe that based on the nature of the capital market and the dictates of their religion, they cannot invest in the market. He said there is therefore, need to develop products that are attractive to these set of investors to allow easy flow of their funds into the market.
“The one that is popular is Islamic finance. Some Christians also do not like certain things, some do not like alcohol, some cannot put their money in companies producing arms and ammunitions some cannot put their money into companies that are gambling and all that. So, all these funds are outside the market, we need to bring them in, call them any name. “If traditional or idol worshippers need certain product, develop it and use it to bring their money into the market. The same thing applies to everybody,” he said.
Olushekun said these products are limited to any religion adding that what is important is to improve the depth of the market by introducing products and instruments that will channel funds, savings into the market.
This, he said would allow those who have projects to be able to raise limitless amount of money from the market to execute those projects.
Analysts said there are a number of very good reasons for the public sector using PPP to assist state governments in developing infrastructure.
