INTRODUCTION
THE last installment of this intervention dwelt on the following themes: institutional reforms, good governance, corruption, weak institutions, the judiciary and red-tapism, others were infrastructural development for power, transportation, human capital development, poor education, insecurity/instability, and policy inconsistencies. Today’s feature recommends a range of initiatives which I believe will make the desired difference in our fortunes. These include project financing, economic diversification and public-private partnerships. Enjoy.
RECOMMENDATIONS
To achieve sustainable economic development and transform Nigeria into a resilient and prosperous economy, bold and deliberate actions are required. These recommendations focus on addressing systemic challenges, leveraging existing opportunities, and fostering a development trajectory that balances economic growth, social inclusion, and environmental sustainability.
PROJECT FINANCING
The multi-billion-dollar funding gap for infrastructure projects remains an underlying concern to the achievement of economic prosperity in Nigeria. While alternative means such as sovereign bonds, equities, bilateral loans, multilateral loans, commercial loans, inter alia were being pursued, project financing remains a key driver for infrastructural development in Nigeria. (Young Grace Chinyere, Understanding The Legal Fundamentals Of Project Finance Contracts <https://www.ajol.info/index.php/naujilj/article/view/136316>Nnamdi Azikiwe University Journal of International Law and Jurisprudence (2014) 5). Project financing helps finance new investment by structuring the financing around the project’s operating cash flow and assets, without additional sponsor guarantees. (International Finance Corporation, Project Financing in Developing Countries <https://documents1.worldbank.org/curated/en/952731468331147256/pdf/multi0page.pdf> ). Thus, the technique can alleviate investment risk and raise finance at a relatively low cost, to the benefit of sponsor and investor alike. Furthermore, in project financing, a legally independent project company is created to own and invest in the project, and the project debt is structured without recourse to the sponsors. Here, project cash flows become the essential means for repaying the lender, making verifiability of cash flows crucial. (Krishnamurthy V. Subramanian, Frederick Tung, Law and Project Finance, Journal of Financial Intermediation, (2016) 25, 154-177 <https://www.sciencedirect.com/science/article/abs/pii/S1042957315000261>).
Project finance offers several advantages for infrastructure development. These include risk sharing amongst stakeholders, whereby sponsors spread the risks through a network of security arrangements, contractual agreements, and other supplemental credit support to other financially capable parties willing to assume the risks. (APMG International, ‘Project Finance — Benefits and Limitations’ <https://ppp-certification.com/ppp-certification-guide/5-project-finance-%E2%80%94-benefits-and-limitations>) Also, project financing helps decide how to manage the free cash flow that is left over after paying the operational and maintenance expenses and other statutory payments, extends debt capacity, and enhances competitive positioning within the market.
Although project finance is a complex financing mechanism, it is particularly successful in economies with weak financial and legal systems.( Johann Lübbe, Project Finance as a driver of economic growth in Africa, <https://journals.co.za/doi/abs/10.10520/EJC-653f68275>). Various companies have been created with a core focus is the facilitation and structuring of project financing arrangements. These companies provide invaluable support to project sponsors, lenders, and other stakeholders in bringing large-scale infrastructure and development initiatives to fruition. Worthy of note in this regard is Africa50, an infrastructure investment platform that focuses on medium to large-scale infrastructure projects that have a significant development impact while offering an appropriate return to investors, which makes early-stage equity investments to fund project preparation to get projects investment-ready, providing project finance using a private equity model. (Cities Climate Finance Leadership Alliance, Africa50 Project Development <https://citiesclimatefinance.org/project-preparation-resource-directory/africa50-project-development#:~:text=Africa50%20Finance%20provides%20project%20finance,and%20the%20African%20Development%20Bank.> ).
The use of project finance must be encouraged by the Nigerian government for the provision of infrastructure, spanning from energy infrastructure to digital infrastructure. However, a robust legal framework is imperative for project financing, as investor confidence, particularly in this aspect, is contingent upon a high degree of credibility. This is also necessitated by the fact that in developing economies, project finance is often operated within a less stringent regulatory environment, with a primary focus on stimulating economic growth and job creation.( Itoma Lux, Project finance in the Developed VS Developing world? (Similarities & Differences) <https://www.linkedin.com/pulse/project-finance-developed-vs-developing-world-similarities-/>). The establishment of security interests, comprehensive contractual agreements, and strict adherence to regulatory frameworks, risk mitigation, and long-term viability constitute fundamental legal issues that should be addressed by project finance laws. (Financely, Project Finance Legal Considerations: Key Issues and Best Practices <https://blog.financely-group.com/project-finance-legal-considerations/>)
NO MAJOR LAW GOVERNING PROJECT FINANCING
Nigeria presently lacks a law that applies to project financing exclusively. However, several key laws and regulations govern project financing transactions such as the Infrastructure Concession Regulatory Commission which regulates public-private partnerships. Additionally, the Companies and Allied Matters Act, the Investment and Securities Act, and the Securities and Exchange Commission (SEC) regulate corporate and investment aspects. Sector-specific regulations, such as the National Electricity Regulatory Commission (NERC) regulations and the Petroleum Industry Act (PIA), apply to projects in their respective industries.
To stimulate economic growth and development, Nigeria must implement comprehensive policy reforms to optimize project financing. These reforms should focus on creating a conducive environment for both domestic and foreign investment. By streamlining regulatory processes, reducing bureaucratic hurdles, and enhancing transparency and accountability, the government can attract significant private sector investment. Furthermore, the government should consider establishing specialized financial institutions to provide long-term financing for infrastructure projects.
The significance of product financing in Nigeria cannot be overstated in light of the continent’s imperative to strategically invest in key Sustainable Development Goal areas. These areas encompass education, energy, productivity-enhancing technologies and innovations, as well as productive transport infrastructure.
DIVERSIFICATION OF THE ECONOMY
Economic sustainability employs practices that support long-term economic growth without negatively impacting social, environmental, and cultural aspects of the community. Such an economy is structured to ensure that the current use of resources minimizes the level of harm to the future use of resources (Imperatives, S. (1987). Report of the World Commission on Environment and Development: Our common future. United General Assembly of the United Nations, New York, United States <https://sustainabledevelopment.un.org/content/documents/5987our-common-future.pdf>). This is essential as it bears on the safety of resources for future generations. The over-dependence on oil in the Nigerian economy goes against the very principle of sustainability. It is imperative that the Nigerian government prioritizes policies that encourage investment and growth in non-oil sectors, thereby widening the nation’s economic base.
Economic diversification involves broadening the range of economic activities, encompassing both production and distribution (Anyaehie, M. and Areji, A. (2015) Economic Diversification for Sustainable Development in Nigeria. Open Journal of Political Science, 5, 87-94. doi: 10.4236/ojps.2015.52010). While it may not necessarily lead to immediate increases in output, it significantly contributes to economic stabilization by reducing reliance on a single sector or industry. Nigeria’s persistent struggle with economic diversification stems from a myriad of factors. The “Dutch disease” effect, whereby resource booms lead to the neglect of non-resource sectors, has been a significant impediment. Thus, high oil revenue raises exchange rates, promotes an adverse balance of payments when prices fall, and reduces the incentive to risk investment in non-oil sectors like agriculture and manufacturing. The nation’s history is replete with instances where short-term spending pressures have outweighed long-term development goals, resulting in suboptimal resource allocation. Additionally, the challenges associated with managing resource revenues, including weak institutions and corruption, have hindered the ability to invest in productive sectors. These factors, coupled with a lack of institutional capacity, have collectively hindered Nigeria’s efforts to diversify its economy and achieve sustainable economic growth.
NIGERIA MUST ADOPT THREE KEY PRINCIPLES
To successfully pursue industrialization, Nigeria should adopt three key principles:
- State intervention should be targeted and limited to addressing market failures, such as infrastructure deficits or information asymmetries;
- Industrial policies should prioritize export-oriented industries, which can generate foreign exchange and enhance global competitiveness;
- Policies designed to promote domestic industries must maintain a focus on competition and accountability, avoiding protectionist measures that can stifle innovation and efficiency.
By adhering to these principles, Nigeria can create a conducive environment for industrial growth and sustainable economic development. Nigeria’s economic trajectory hinges on its ability to leverage its natural resources and diversify its economy. While the nation possesses abundant oil reserves, it is imperative to move beyond a resource-dependent model and embrace value-added activities. The digital economy also presents a promising avenue for Nigeria’s economic transformation. The rapid growth of the telecommunications and IT services sectors, coupled with a young and tech-savvy population, positions Nigeria to harness the potential of the digital age. By investing in digital infrastructure, fostering innovation, and promoting digital literacy, Nigeria can overcome traditional development challenges and emerge as a global digital powerhouse.
PUBLIC-PRIVATE PARTNERSHIPS
Public-private partnerships (PPPs) are also a significant driving force for economic sustainability. With PPPs, the government can leverage private resources and skills to meet the growing demand for growth and even employment. However, for effective implementation, the government must establish robust legal and institutional frameworks for public-private partnerships and be able to identify and select suitable projects, conduct transparent tenders, structure comprehensive contracts, and implement effective oversight mechanisms to ensure the successful execution of PPP projects.
Since 2019, Africa has significantly advanced its efforts to identify and train infrastructure experts throughout Africa. The Africa Project Finance Program initiative is training infrastructure finance and public-private partnership specialists who will play a key role in shaping sustainable infrastructure financing solutions for the continent. However, there is a need for PPP strategies to be based on knowledge of the inherent challenges and limitations that the African market faces ( Johnson Mwawasi Kilangi, Address today’s challenges to build a sustainable long-term PPP strategy for Africa <https://blogs.worldbank.org/en/ppps/address-todays-challenges-build-sustainable-long-term-ppp-strategy-africa> ). Well-structured and effectively implemented PPPs can create social value through on-time and on-cost delivery, generating efficiency gains and offering innovation in project design, incorporation of global expertise, and accessing new sources of capital. (To be continued).
THOUGHT FOR THE WEEK
“Human rights are not only violated by terrorism, repression or assassination, but also by unfair economic structures that creates huge inequalities”. -Pope Francis.
