Enhancing Infrastructure Through Debt Capital Market

Globally, infrastructure contributes to economic development by increasing productivity and providing amenities, which enhance the quality of life. The services generated as a result of adequate infrastructure base will translate to an increase in aggregate output.
However, investment in infrastructure services, such as transportation (roads), electricity and water are intermediate inputs to production, this is because infrastructure services tend to raise productivity of other factors as it is often described as the ‘unpaid factor of production.’
Although, Nigerian Capital market has suffered monumental losses due to sustained decline in stock prices as a result of huge decline in investment value occasioned by financial crisis, the country’s huge infrastructural deficit in power, housing, roads, healthcare, port services among others has contributed to a large extent in retarding the overall growth and development of the sector, which is the center for capital formation. Meanwhile, against the backdrop of a comatose industry, stock market operators have agreed that the growth of investment business in any nation largely depends on economic development.
They are calling on authorities to intensify efforts on infrastructural development to enhance citizens’ standard of living. However, experts also believe that since the banking sources are unable to meet the growing financing need in Nigeria’s infrastructure, there is need to bridge the infrastructural gap through the nation’s debt capital market to achieve the desired growth.
Debt capital market
Debt capital market is a market for trading debt securities where business enterprises (companies) and governments can raise longterm funds. This includes private placement as well as organised markets and exchanges. The debt capital market trades in such financial instruments that pay interest.
There are bonds and several loans, which act as the prime financial instrument of the market. Because of this interest, the debt capital market is also known as fixed income market. Debt capital market and equity market jointly make the capital market. These markets are used by governments and several companies for raising long and short term funds.
The trade in these markets is done through several financial instruments. Debt capital usually refers to long-term capital, specifically bonds, rather than short-term loans to be paid off within one year. If the short-term debt is continually rolled over, however, it can be considered relatively permanent and thus debt capital.
Need to bridge infrastructural gap
The Managing Director/Chief Executive Officer, Chapel Hill Denham Group, Mr. Bolaji Balogun, believes that over the next decade, Nigeria requires N28 trillion to fund infrastructure from private sources. Balogun, while delivering a paper on Accessing Debt Capital Market for Infrastructure Financing, Opportunities and Challenges at the FMDQ Nigerian Debt Capital Markets workshop 2015, said that over the next decade, N2.8 trillion would be required annually to fund infrastructural gap. He noted that the current financing approach was neither sustainable nor scalable.
Balogun said that banking sources were unable to meet the growing financing need in Nigeria’s infrastructure, as banks would have to grow loans at circa 20 per cent per annum to meet this requirement, compared to circa 9 per cent 2009-14 CAGR.
He noted that tighter regulatory requirements under Basel III rules would increase pricing and reduction in supply of long term bank debt, restricting long-dated bank lending in the absence of long term deposits. Balogun said using domestic capital sources as an alternative source financing was necessary to make infrastructure sustainable and viable.
He listed option for sustainable DCM structure to include project bonds and infrastructure debt funds.Balogun noted that infrastructure equity was more suitable to private equity, SWFs and large family offices with greater exposure to the asset class and expertise in infrastructure financing. He said that given the relatively early stage of infrastructure financing in Nigeria, infrastructure debt funds perhaps represent the best near term approach for pension funds and other institutions to invest in infrastructure debt.
The Chairman, FMDQ OTC, Dr (Mrs.) Sarah Alade, urged participants to come out with reforms that would accelerate funding of the private sector-led power, transportation and housing infrastructure in the country to ease pressure on government finances. Alade called for established of blueprint on ways to leverage the nation’s DCM to stimulate sustainable growth in the real sector.
Apex regulator’s partnership
In an effort to help bridge the infrastructural gap in the country, the Securities and Exchange Commission (SEC) pledged collaboration with FMDQ OTC to create a vibrant debt capital market (DCM) targeted at financing the nation’s infrastructure deficit. SEC Director-General, Mr. Mounir Gwarzo, said that the country’s infrastructure deficit could only be financed through a vibrant debt market.
He said that it would take the country 30 years to close its infrastructure gap. He said the infrastructure gap would not be financed with budgetary allocations of the Federal Government but through a strong domestic debt capital market. Gwarzo said that government should access the debt capital market for long-term project instead of relying on bank borrowing.
He said that the revenue squeeze and tight monetary policies made it mandatory for government to float sub-national bonds to close infrastructure gap. Gwarzo said that the commission would continue to support FMDQ to develop the nation’s debt capital market to achieve the desired growth. The director-general commended FMDQ and pledged commitment to the development of the debt market, saying that the company’s annual volume grew from N7.1 trillion in 2012 to N5 trillion monthly in 2015.
Support from IFC
The Country Manager, International Finance Corporation (IFC) Nigeria, Mrs. Eme Essien Lore, said that the corporation would continue to support development of the debt market. Lore said that the corporations would only achieve its mission through a vibrant local debt market.
She said that the Nigerian capital market was very important to the corporation because “it is the largest economy in sub-Saharan Africa.” Lore said that Nigeria would be resilient to economic crisis with a vibrant capital market, adding that the IFC would continue to invest in the country. She said that IFC would continue to create access to long-term finance and job creation in Nigeria.
While the country’s journey towards Vision 2020 is noble, the government needs to focus strongly on institutional policy changes and sector reforms. This is essential towards improving the investment climate capable of attracting private investors at the level that can meaningfully finance the nation’s infrastructure deficit.

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