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Some of the Challenges/Risks of Project Financing in Nigeria and Proposed Solutions
Muhammad Sani Umar
Managing Partner at Nobilis Solicitors
According to Comer (Fall 1996, p. 3), there is no singular definition of project finance. However over the years, Project Finance has evolved into a vehicle for pulling together, a syndicate of investors, lenders and other participants to embark on infrastructure projects that would be too large for individual investors to underwrite. This essay examines Project Finance in Nigeria in the above light, and discusses some of the challenges and risks associated with it. These challenges include limited local financing, political risks and counter-party risks. Accessing local financing has over time proved to be a very arduous task for businesses requiring huge capital for projects. This may be blamed on banking policies, high interest rates and a poor history of credit defaulters. Political risks almost always arise from government policies and rigid statutory and regulatory frameworks governing business operations, taxation and finance. A Counterparty may also default under a contract, and thereby expose a project financier to irredeemable losses. The possible solutions to these challenges were also considered.
Accessing local finance for projects in Nigeria is not usually a default option for private investors but a recourse engendered by low or non-existent sovereign credit rating. Debtwire (2017) in its article, Africa Project Finance Evolves to Fill Funding Gap, Structural Challenges Remain, examines the importance of sovereign guarantee in Project Finance, and states as follows,
In Africa, a key component of the project finance structure is the role of the government – or host country – as guarantor of part of the transaction. In many cases, this can make projects more expensive and riskier than other regions. According to Sarac, this is attributable to the fact that economies are structured in a way that the sovereign is very much involved in the final investment decision process.
As a result of this key role that government is expected to play in project finance, foreign investors not only make sovereign guarantee a condition precedent for foreign direct investment in any project, they also consider the creditworthiness or credit rating of the sovereign to ensure that the value of the sovereign guarantee to be issued is not merely equivalent in total value to the papers on which it is printed. The offshoot of this challenge is that both the public and private sector find it difficult to raise funds externally and have to look inward towards local finance.
Local finance has become an exodus destination for investors within Nigeria, thus overwhelming available capital from the already narrow financial market and diluting its impact. Gravito et al (2017 p. 7) list ‘narrow financial market’ as one of the challenges facing project finance in African countries. Nigerian banks are also cringing under the enormous weight of bad debts owing to the inability of debtors to repay their loans. As Fagbure (2017) writes, ‘It is no news, that our banks are heavily burdened by non-performing loans (NPLs), with figures nearing N15trillion’. Consequently, banks are very unwilling to finance projects requiring huge capital, and on the very rare occasions when syndicated loans are granted by the banks, the interest rate is usually at an unattainable peak and the usual collateral requirement for such loans is an all asset debenture on the debtor’s asset, which not only prevents the debtor from assessing loans elsewhere, but also makes the debtor very unattractive to other investors.
Political risks, when considered in the Nigerian context, are the most vital risk areas to project finance when considered against the events in the Nigerian political theatre. These risks may take the form of war and insurrection as Nigeria has in the Boko Haram example (Adebisi et al, 2017), currency inconvertibility and transfer, nationalization and expropriation. Stears Business (2015) states that political instability is also a risk to Project Finance. Political risk could also occur from changes in laws relating to ownership or tax regimes being gradually changed, thereby making it increasingly difficult for the project to perform effectively, or an encroaching government takeover of the project, politically backed strikes, failure to grant the relevant permits would also fall under political risks. According to a report by Vanguard (2017), Bi-Courtney Aviation Limited, a Nigerian Company granted concession to build, operate and transfer the domestic wing of the Murtala Muhammad Airport in Lagos-Nigeria had its share of the above risks, bickering with the Nigerian Government over issues ranging from tax disputes to government’s alleged failure to honour the terms of the concession agreement made in 2007.
Counterparty risk sometimes occurs as a result of the inability of participants in project finance to properly align their interests and assume their risks. This could lead to parties defaulting under the contract. According to Country Hill Attorneys and Solicitors (2017),
Project finance transactions involve a number of participants whose interests do not always align perfectly, and for a project to be successful, there must be appropriate and economical allocation of risk, which is usually difficult to achieve. Also, risk allocation issues can create tension between the parties and resolving these issues can slow down the progress of the project
As part of the solutions to the challenges of project finance in Nigeria, Government must strive to extinguish all forms of security issues presently discouraging foreign investors, relax straitened areas of regulations and drive amendment/enactment of banking and investment laws that would deepen the financial market. The Nigerian government must also display the political will to support foreign direct investment and take the economy as the centre-point of its administration. This will give rise to a boost in the economy and consequently incentivize potential project financiers. Parties to Project Finance Agreements can also take out insurance policies for as many of the associated risks as possible, to minimize losses in the event that a project fails.
The above stated problems are but a few of the problems facing project finance in Nigeria and the suggested solutions if followed to the letter will not only give the Nigerian government better credit rating in the eyes of potential investors but will also take off the burden from, and strengthen local finance and by extension, the project finance landscape.
Adebisi et al, Appraising the Effect of Boko Haram Insurgency on the Agricultural Sector of the Nigerian Business Environment, Journal of law and Governance, 2017. Available at https://www.researchgate.net/publication/313269468_Appraising_the_Effect_of_Boko_Haram_Insurgency_on_the_Agricultural_Sector_of_Nigerian_Business_Environment. (Accessed on 1st December 2018)
Aderinsola Fagbure, Banks, Loans and Bad Debts, Pressreader, 2017, available at https://www.pressreader.com/nigeria/thisday/20170801/281998967537193 (Accessed 1st December 2018)
Comer B, Project Finance Teaching Note, The Wharton School (Fall 1996), Available on http://finance.wharton.upenn.edu/~bodnarg/ml/projfinance.pdf (Accessed 1st December 2018)
Debtwire, Africa project finance evolves to fill funding gap, structural challenges remain (June 2017) Available on https://www.debtwire.com/info/africa-project-finance-evolves-fill-funding-gap-structural-challenges-remain, (Accessed on 1st December 2018)
Herdem Attorneys At Law, How to Secure Projects: The Significance of Insurance in Project Finance, 2018, Available at http://herdem.av.tr/secure-projects-significance-insurance-project-finance/ (Accessed 1st December 2018)
Luis Gravito et al, Infrastructure Financing In Sub-Saharan Africa Best Practices From Ten Years In The Field, The Boston Consulting Group & African Finance Corporation, May 2017, Available at file:///F:/WEEK%204/BCG-Report-Africa-May-2017-Electronic-v12-may.pdf (Accessed 1st December 2018)
Stears Business, The Nigerian Project Finance landscape, 2015 Available at https://www.stearsng.com/article/the-nigerian-project-finance-landscape. (Accessed on 1st December 2018)
Vanguard, MMA2 Concession: Aviation analyst advises FG, Bi-Courtney to settle out of court, 2017, Available at: https://www.vanguardngr.com/2017/10/mma2-concession-aviation-analyst-advises-fg-bi-courtney-settle-court/ (Accessed on 1st December 2018)