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TRANSPORT INFRASTRUCTURE FINANCING MECHANISM FOR

FINANCIAL INSTITUTIONS IN NIGERIA

PRESENTATION BY

Ross Oluyede

THE AG. MANAGING DIRECTOR/CEO - THE INFRASTRUCTURE BANK PLC

AUGUST 2021

Nigerian

Institute of

Transport

Technology

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Contents

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❑ Introduction

❑ Financing Transport Infrastructure

❑ Funding options for Infrastructure

❑ Public-Private Partnership – a financing option

❑ Opportunities for Transport infrastructure financing

❑ Other opportunities in infrastructure financing

❑ Summary

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Introduction Infrastructure Deficit Challenge

❑ Capital investments in infrastructure have been widely recognized as a veritableroute for engendering sustainable economic development and inclusive growth.

❑ Linkages between economic growth/sustainability and infrastructure development,are validated by the observation that “developed economies typically record coreinfrastructure stock value of about 70% of GDP (roads, rail, ports, airports, power,water, ICT), with power and transportation accounting for at least 50% of totalvolume.

❑ In contrast to international benchmarks, Nigeria’s core infrastructure stock isestimated at about 20% to 25% of GDP, for which the National IntegratedInfrastructure Master Plan (“NIIMP”) estimates that about USD35billion is requiredannually over the next 5years to sustain robust economic growth, in the near term,and USD3trillion is needed over 30 years.

❑ With fiscal and budgetary funding constraints plaguing governments at all levels,the cold reality is that private participation in infrastructure is an economicnecessity, rather than an optional financing solution, as hitherto considered.

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Source: National Integrated Infrastructure Master Plan and TIB’s proprietary research

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Housing and Regional Dev.• $350billion i.e. 11% of total

• Increase the number of housing

units to close current deficit (16

million units deficit)

• Develop urban infrastructure

Agriculture, Water and Mining• $400billion i.e. 13% of total

• Develop water supply and

irrigation networks

• Develop crop processing zones

• Build basic mining infrastructure

Transport• $775billion i.e. 254% of total

• Rehabilitate & expand national

and regional road networks

• Rehabilitate rail links, upgrade

main airports and develop

inland waterways

Social infrastructure• $150billion i.e. 5% of total

• Construction of facilities for

education, hospitals, women

and youth development and

sports centres

Introduction Projected 30-year Investments by Sector...

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Energy• $1trillion i.e. 33% of total

• Increase generation and

transmission capacity

• Construct gas infrastructure

• Increase refining capacity

ICT• $325billion i.e. 11% of total

• Expand mobile network

capacity and coverage area

• Expand broadband fibre optic

network capacity &coverage

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Introduction contd.

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❑ Transport – a derived demand, is vital to the well-functioning of economicactivities and a key to ensuring social well-being and cohesion of populations.

❑ Transport ensures everyday mobility of people and is crucial to the productionand distribution of goods. The only physical infrastructure that connects andoverlaps (sectoral) economies

❑ Adequate infrastructure is a fundamental precondition for transport systems.

❑ In a bid to facilitate transport, governments are faced with physical barriers orhindrances:

❑ insufficient or inadequate transport infrastructures;

❑ bottlenecks and missing links; and

❑ lack of funds to remove them.

Transport Infrastructure pictures - https://www.istockphoto.com/photos/transportation-infrastructure5 5

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Introduction contd.

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Transport Infrastructure defined

❑ Transport infrastructure consists of the fixed

installations including roads, railways, airways,

waterways, canals and pipelines and associated

terminals such as airports, railway stations, bus

stations, warehouses, trucking terminals.

❑ It refers to the framework that supports transport

system.

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Financing Transport

Infrastructure

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❑ Investment is needed to develop new transport

infrastructure and to rehabilitate what is already in

place

❑ These investments will have to come from either public

or private sources

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Financing Transport

Infrastructure

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Infrastructure finance by agent

Infrastructure Financing

Public

Central & Local

Governments

Development Institutions

Private

Corporate Finance

Public Companies

Private Companies

Project Finance

PPP Non-PPP

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Financing Transport

Infrastructure

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Sources of funds (capital) for infrastructure financing

Public Sector Financing

- Tax Revenue

- Non-Tax Revenue

- Public Bond Financing

- Loans/grants from DFIs and official development assistance

Private Sector Financing

- Debt

- Commercial Banks

- Non-Bank Financial Institutions

- Corporate Bonds

- Equity

- Public and Private Equity

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Financing Transport

Infrastructure

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Financing Instruments: An Overview

Financing Tools Private Funding Public Funding

Government Budget None General Taxes

Capital Financing Senior Shares

Mezzanine Financing Equity Preference Shares, Convertible Shares

Debt Subordinated loans, subordinated bonds

Debt Financing Loans Commercial loans Loans from govts, banks and OFIs

Bonds Private Issue Project bonds Bonds with Sovereign Guarantee,

Municipal bonds etc.Public Issue

Guarantees BGs, Credit Line, direct

insurance etc.

Sovereign guarantee, guarantee of

state/International /regional FIs

Revenue generated by projects Toll revenues, Revenue generated by secondary developments

Value capture; using part of the added value

generated by the project, enjoyed by its beneficiaries

None Increase of property taxes, tax

surplus funding, land lease fee etc.

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Funding Deficit for Infrastructure

Government Funding Options

$10 billion p.acurrent Govt. investments in infrastructure

$33billion p.a.investments required over the next 5 years

Required Investments

On-budget Funding

Primarily from government revenue.

Includes: Budgetary Allocation, Enhanced Statutory Allocation, Viability Gap Funding

Off-budget Funding

Govt. assumes some financial commitments as is the case with Special

Intervention Funds, Bonds, Low-interest concessional loans, Financing from aid and donor agencies

Private Sector Funding Options

Funding is sourced through means that may require minimal or no government contribution. Includes: PPPs, Pension Fund, Long Term Commercial Bonds (Capital Markets), Multilateral Agencies, Export Credit Finance, Private Equity, Infrastructure Funds

Funding deficit $23 billion p.a.

i.e.

$100 billion (5yrs)

Funding

Options

Current Investments

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Funding Options for Infrastructure

FISCAL BUDGET

In the face of the dwindling oil

revenues (accounts for over 80% of

FGN income) and ballooning debt

portfolio approaching US$90billion,

budgetary funding should be for social

projects and stimulating investments in

commercial assets

DEPOSIT MONEY BANKS

Banks have (even with N24trillion+

sector balance sheet) developed a

strong apathy to infrastructure projects,

being constrained mostly to short and

medium tenured liabilities.

CAPITAL MARKETS

Capital markets remains largely

confined to basic equities and

government linked securities, and lack

the depth necessary for funding long

term infrastructure investment.

EXPORT CREDIT AGENCIES

Export Credit Agencies virtually only

provide funding having recourse in

some way to commercial banks or

Federal Government balance sheet.

PENSION FUNDS

Pension funds are constrained by

regulation, in addition to a lack of

well-structured infrastructure financing

deals and capable/ reliable project

sponsors.

MULTILATERAL AGENCIES

Multilateral agencies and DFIs only

provide funding with recourse in some

way to the government balance sheet

– already constrained as earlier

described.

PPPs

PPP methodologies have proven

a viable option, especially for

small to medium scale

infrastructure investments.

Hinged on Project Finance

mechanism PPPs will unleash

unprecedent infrastructure

growth

Jump-starting

large scale

investment into

the infrastructure

requires a game-

changing

approach……

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Typical PPP Type Transaction

Project

Implementation

Vehicle

Financial

Sponsor

Technical

Sponsor

Equity Funding

Shareholders

Agreement

Service-

Users/Off takers

(public/citizens)

Government

Concession Agreement

(or similar transaction

agreement), Catalytic

funding, securing

project site or ROW,

relevant approvals, etc.

Service Level

Agreements

Regulators

(ICRC/MDAs)

Constructors

Operation and

Maintenance

Entity

Operations and

Maintenance Contract

Construction ContractBanks/Lender

Project Debt

Project Documents

Political Risk Cover (FGN,

Insurance, ECA, etc)

Oversight of standards during

planning & documentation,

construction, and operation

and maintenance phases

Security

AgreementsGuarantee

Agreement/Insurance

Contract

Letter of Comfort

Support Framework

Revenues

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Development Phase

• High risk

• Low quantum of investment

• No revenue generated

• Financing arduous

• Intangible assets created

• Catalytic funding may be required

• Proprietary (venture capitalism) in nature

Construction Phase

• Financial Closure

• Risk transferred to Constructors

• No revenue generated

• Interest payments may be capitalised

• Repayments may last construction period

• Lenders have recourse to Sponsor

Operation and Maintenance Phase

• Project is significantly de-risked

• Revenue is generated

• Debt service commences

• Refinancing possible

• Royalties/other payments to FGN

• Full regulatory oversight

• Investors/Financiers recoup investment

The risks and issues faced in each phase is different and unique…

Distinct Phases of PPP Project Cycle

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Attracting Private Sector Funding

Private

Sector

Capital +

Project

Concepts

Regulatory and

legal Framework;

Policy Stability; &

Political Risk

Mitigation.

Financial Credit

Enhancements;

Quality Data;

Project Development

Funding; Capacity

building

Principal

Transaction

Agreements,

Bankruptcy remote

– Collaterised Debt

Obligations

Bankable

National

Infrastructure

Projects

Catalyzing Investments

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Bankability Issues Hindering PPP Projects

❑ For Financial Institutions: Successfully deploying private capital into PPPProjects is dependent on the attainment of project bankability. In a broadsense, project bankability can be assessed along three (3) key tenetsnamely:

1. Comprehensiveness of the legal, institutional, and regulatory framework:Pertains to the existence of robust legal, regulatory and institutional framework thatmitigates risks such as: arbitrary policy changes; change in public office holders;non-enforceability of contracts; termination of administrations through democraticand undemocratic means; bureaucratic hurdles, etc. any of which would put privatecapital at risk and would truncate the project.

2. Assurance of financial viability: Which is ascertained via robust analyses(financial, economic, sensitivity, etc.) to determine the ability of revenues to matchcosts (includes construction, O&M and financing costs) over the project lifecycle.Attainment of financial viability is thus a precondition for securing an investmentdecision.

3. Sustainability of the transaction structure: Relates to articulation and definition oftransaction structure that clearly defines and enforces them:

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Other Bankability Issues for PPP Projects

❑ A holistic approach to project development is necessary to enable projects attainbankability parameters i.e. ability of a project to attract and secure fundingcommitments from financiers. To achieve this, an efficient financial ecosystem isrequired to ensure that available funds adequately match the profile of the projectsunder development and that these funds are accessible to Project Proponents.

❑ An efficient financial ecosystem is reflective of the following key characteristics:

❑ Active participation by all relevant financing partners – includes deposit money banks,pension funds, export credit agencies, fund managers, insurance companies equityinvestors, and public financing institutions such as the Central Bank and treasury agencies;

❑ A well-articulated and consistent legal and regulatory environment, which delineates theroles and responsibilities of key players, is devoid of undue political interference andinstitutes appropriate mechanisms for monitoring and compliance enforcement;

❑ An array of market-responsive financial instruments that are able to secure fundingcommitments from the pool of funding sources available; and

❑ A reliable securities valuation system where, the pricing of financial securities isdetermined by market forces such as the riskiness, liquidity and tenor of the security.

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Bankability Issues – A PanaceaCase for Government-sponsored credit enhancements

❑ The application of private capital and expertise in the delivery of infrastructureprojects does not absolve government of its responsibilities for the provision ofpublic services to its citizenry; an obligation that may be conceded to a privatefinancier/operator.

❑ Government must take the lead and play an active role in attracting private capitalby actively supporting transaction structures that incorporate due protections againstaforementioned risks and other project externalities.

❑ A key area where government intervention is urgently required in the provision ofcredit enhancement/ financing instruments capable of providing investors andfinanciers with the requisite assurance/comfort of sustainable and stable returns oninvestments, in order to unlock private capital for infrastructure projects.

❑ Whilst financiers and investors desire comprehensive protections against political,market, legal and regulatory risks, governments are averse to providing blanketguarantees that run high risk of crystallizing as contingent liabilities. As such, it isnecessary to advocate for innovative financing and credit enhancementinstruments such as Minimum Revenue Guarantees, Political Risk Guarantees,Viability Gap Funding (VGF), Take or Pay, etc.

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❑ With a yawning infrastructure gap of $75billion over the next 5 years, the need for privateinvestments is no longer optional, rather it is mandatory, if the nation is to meet itsdevelopmental goals and reverse the trend of poverty, unemployment, inflation, etc.

❑ Infrastructure projects can only attract private sector funding where the project is deemed tobe bankable, as evidenced by the legal and regulatory framework, project’s financialviability and the sustainability of the transaction structure.

❑ Deposit Money Banks (DMBs), Capital market instruments (bonds, commercial papers, etc.),Contractual savings (mutual funds, pension funds, insurance companies) and InfrastructureFunds are sources of funding for infrastructure projects.

❑ Given the varying parameters of these funds, in terms of the gestation period (tenor),expected rate of return, repayment profile, securitization requirements, etc. specialconsideration must be applied to selecting funds of the right temperament to ensurealignment of the funding source with the project’s financial profile.

❑ Given our wealth of experience, TIB is able to prepare projects that are able to attractprivate investments for development of critical national infrastructure projects. TIB standsready to partner with key stakeholders to ensure the development of infrastructure projectsunder a sustainable financing regime.

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Seizing the Initiative…

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Opportunities for Transport Infrastructure Financing

– Some key Project Imperatives

ROADS / BRIDGES ROAD FURNITURES

• Development of new roads connecting economic/commercial centres

• Rehabilitation of existing paved roads connecting key population centres to each other

• Optimisation and commercialisation (via PPP) of existing functional rail lines

• Development of new rail lines, either along exiting Right of Way or new alignment, via PPP

• Re-development of nation’s airports and associated infrastructure

• Infrastructure for integrating the various modes of transportation –marine, road, railway.

Transportation

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Other opportunities for Infrastructure Financing

– Some key Project Imperatives

Real Estate & Mass Housing

• Low-cost Mass and Social housing facilitated by “smart” government intervention

• Provision of engineering infrastructure for planned and existing districts

• Growing the stock of available commercial real estate and hospitality spaces in underserved cities

• Hostel developments for tertiary institutions in all six geopolitical zones

• New cities development and urban regeneration project

Power

• Distribution and transmission infrastructure to complete implementation of power sector reforms

• Gas distribution and transmission infrastructure for power plants

• Institutional support for off-grid power solution for whole towns and communities

• Investment in backbone transmission infrastructure

• Harness the potential of the budding renewable energy sector – solar, wind.

• Coal to power plants proximate to existing coal mines

Water and Others

• Development of water treatment & reticulation systems in cities

• Development of municipal infrastructure – markets, abattoirs, hospitals, recreational facilities

• Provision of agricultural products storage facilities in agrarian States

• Information and Communication Technology (ICT) for rural dwellers with limited or no access

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Strengthening Regulatory Space - ICRC’s role in

supporting attainment of PPP Project Success

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S/n Legal & Regulatory Framework Financial Viability Assessment Ensuring Sustainable

Transaction Structure

1 Issue consistent, unambiguous

regulations and guidelines &

policies

Conduct rigorous, efficient,

independent project appraisals to

enable fair adjudication and

negotiations

Advise FGN on the perils of

political interference and

promote similar practice by

related parties

2 Take charge of, and coordinate

inter-institutional collaboration for

PPP project delivery

Sponsor and drive initiatives for the

implementation of government-

sponsored credit enhancements

Assist MDA with contract

compliance monitoring

3 Proactive advocacy for sectoral

legal and regulatory reforms

Work with MDAs to negotiate and

finalise financing agreements based

on global best practices

Adjudicate and advocate

for contract sanctity and

support implementation of

enforcement mechanisms

4 Advise and assist FGN with

resolutions of existing PPP project

towards providing the FGN with

credibility in the project finance

space

Create or work with stakeholders to

enable a functional faculty for

training and retraining MDAs, PPP

operators in relevant skills

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Summary

❑ Financial institutions can play a very critical role to significantly reducethe huge infrastructure deficit in Nigeria.

❑ PPPs are a veritable mechanism for financial institutions participation ininfrastructure financing.

❑ PPPs underpinned by Project financing mechanism provides the channelfor financial institutions to inject the much needed private funding intotransport infrastructure and other critical infrastructure.

❑ Project bankability is the critical attraction for apposite funds forinfrastructure development.

❑ Appropriate legal and regulatory framework provides the enablingenvironment and boost local and international financial institutions’appetite for infrastructure risk asset investments.

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The Infrastructure Bank Plc

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Our VisionTo be the premier focal

point for infrastructure

development in Nigeria

-- by being the premier

institution in the area of

infrastructure development

-- by serving as a rallying

point for all other

stakeholders

Our MissionTo facilitate the transformation of

Nigerian infrastructure for

enhanced productivity

- - by identifying and structuring

infrastructure projects that will

have a transformational effect

at Local, State and National

level

- by modernizing Nigeria’s

infrastructure base for a more

productive Nigeria

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Who We Are…

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❑ Unique position as an institutional PPP

❑ Private sector leadership and discipline

❑ Licensed to tap and manage Local and Foreign Direct Investment for infrastructure development funding in Nigeria

❑ Track record of collaborating with federal and state governments on infrastructure financing

❑ Internationally trained and experienced staff, skilled in infrastructure project finance structuring

❑ Sound risk management regime

❑ Strategic alliances with international financial and technical partners (DBSA, PwC, IDC, Aurecon, CANAC, Banco Efisa, ICF-GHK)

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TIB Financial Services

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❑ Project Finance Advisory and Arranging: We offer bespoke transaction advisory services toClients to assist them in the preparation of projects, prior to arranging funds required from bothlocal and offshore sources.

❑ Development Loans: The Bank provides price-competitive development loans to commerciallyviable projects that have significant developmental impact.

❑ Project preparation funding: Towards ensuring credible project ideas and concepts reachbankability, the Bank offers funding for project preparation/development activities for candidateprojects.

❑ Bespoke PPP Advisory: Our clients have access to specialized development and technicaladvisory specifically for Public-Private Partnership projects in our operating environment.

❑ Proprietary Equity: The Bank has developed equity and quasi-equity (mezzanine financing)investment products for projects that require risk capital as a form of catalytic funding.

❑ Fund Management: The Bank offers fund management services to both domestic and externalsovereignties and institutions seeking to fund infrastructure development.

❑ Capacity Building and Technical Assistance: The Bank collaborates with other multilateralagencies and DFIs to promote, organize and deliver technical assistance and capacity buildingprograms.

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TIB Track Record

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❑ Preferred Bidder on the Lagos Metro Rail Transit – Redline Project: a 37km rail linefrom Alagbado to Marina with a project capex of US$2.5billion (ProprietaryInvestment/Transaction Advisory)

❑ US$1billion Rehabilitation and Reconstruction of 127km Lagos-Ibadan Expressway(Transaction Advisory/Fund Arranger)

❑ Development of a US$1billion 261-km super-highway from Calabar to Katsina-Alavia Obudu (Transaction Advisory/Fund Arranger)

❑ Development of a US$1.4billion Water Supply Scheme through a Build, Own,Operate, and Transfer (BOOT) Concession to be granted by the Lagos StateGovernment

❑ US$1 billion Renewable Energy and Efficient Energy Projects (REEEP) (TransactionAdvisory/Fund Arranger)

❑ Nigerian Railways Rehabilitation and Revitalization Project (Advisory)

❑ Infrastructure Plaza: high-end mixed use real estate in Abuja (Transaction Advisory/Fund Arranger)

❑ Development of 20,000 Mass Housing units for Federal Paramilitary Forces (Catalytic Loan/Transaction Advisory/Fund Arranger)

❑ N25bn - Public Mass Transit Revolving Fund (Fund Management / Agency Management Agreement)

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Q & A