One of the main benefits of a successful capital market is its ability to provide financing for important projects. Nigeria’s capital markets are no exception and are now regarded by a government keen to press ahead with a major programme of infrastructure development. According to Zainab Ahmed, the minister of finance, the country needs around $2.3trn over the next 21 years to become a fully modernised and industrialised country. This figure is cited in the National Development Plan 2021-25, which forecasts an immediate 30% increase in expenditure on capital projects over the plan’s timeline. According to Ahmed, some 86% of investment is expected to come from the private sector over the five-year period. It is an ambitious scheme, with a long list of road and rail projects, power stations and grids, housing schemes and agricultural investment all required. Raising such a large amount of capital for infrastructure, which typically involves long-term financing, necessitates some challenges. However, the capital markets can provide a number of instruments to help, in addition to the programme of conventional and sukuk (Islamic bonds) – sales the government is already rolling out to finance its budget.

Plans & Programmes

Nigeria’s government and businesses have long been aware of the infrastructure gap. An expanding population and robust economic growth have placed pressure on existing networks, and demand for new construction outstrips supply. One idea for meeting this challenge is to establish capital markets-based infrastructure funds. Indeed, in 2019 this approach was advanced by the Securities and Exchange Commission, the capital market regulator. This came after a report from international consultancy McKinsey & Company suggested a need for a yearly investment of $31bn for a decade to bridge the country’s infrastructure gap. In the years since, the government’s actual capital expenditure has been short of that figure, with just $5bn invested in 2019. The numbers have also been growing, with 2020 seeing Moody’s estimate $3trn in investment by 2050 to fill the national infrastructure hole.

Infrastructure Funding

Infrastructure funds have been tapped to help stem this gap. For example, in 2021 Stanbic IBTC Bank launched a N100bn ($238.25m) closed-end unit trust programme targeting fund managers, insurance companies, high net-worth individuals, development finance institutions and pension funds. According to its April 2022 report, the fund had achieved an annualised return of 13% on its Series I issue, with a 10-year Series II issue about to launch.

Pension funds are seen as a key potential source of finance for such long-term, reliable infrastructure funds. Reliable is the key word, as the pensions’ regulator, the National Pension Commission, requires an infrastructure fund to receive a minimum “A” grade from two ratings agencies before allowing a pension fund to invest. This has also given added impetus to the development of an indigenous credit rating system, a further benefit for the country’s capital markets and wider financial sector. At the same time, the capital markets have already proved invaluable as an arena for the government to raise finance for its own investment in infrastructure. Since May 2021 state governments have been permitted to issue debt instruments to fund their own infrastructure development programmes.

Federal government borrowing is also set to rise, with 2023 seeing plans to source a further N8.8trn ($20.9bn) on the domestic and international markets. However, this poses significant challenges, as though Nigeria’s debt stock is low by some international standards – around 25% of GDP in 2022, likely rising to 35% in 2023 – and servicing it is a major drain on fiscal revenue. Concerns over the manageability of such debt burdens thus caused considerable uncertainty in the country’s bond markets in late 2022. Thus, capital market infrastructure funds will offer an increasingly reliable way to finance some vital projects and to mobilise the private sector to take up this key challenge to future growth.