Almost $20bn worth of Nigerian pension funds are mostly sitting idle in government securities when at least a quarter could be more optimally deployed towards developing critical infrastructure in the country.
In early 2017, the Nigerian Sovereign Investment Authority (NSIA) – manager of Nigeria’s sovereign wealth fund – established an infrastructure credit enhancement facility to help tap these funds. The Infrastructure Credit Guarantee Company Limited (InfraCredit) was set up in partnership with GuarantCo, a London-based provider of infrastructure credit guarantees supported by the governments of Australia, the Netherlands, Sweden, Switzerland and the UK.
Initially capitalised to the tune of $200m, InfraCredit’s promoters envisage this will eventually be raised to about $2bn. Essentially, it will provide guarantees to enhance the credit quality of local currency debt instruments issued to finance eligible infrastructure-related assets in Nigeria, allowing pension funds to invest in projects previously deemed too risky.
In the words of Uche Orji, chief executive of NSIA: “InfraCredit will enhance Nigeria’s capacity to attract and unlock latent pools of capital from pensions and insurance for infrastructure investment into key sectors of the Nigerian economy.” Nigerian pension funds are certainly excited about the prospects. “The potential for InfraCredit is huge”, says Eric Fajemisin, chief executive of Stanbic IBTC Pension Managers, the largest pension fund manager in the country, with responsibility for at least 25% of total industry assets under management.
InfraCredit will provide some form of comfort for pension fund administrators (PFAs), who are still relatively new to infrastructure financing and are naturally worried about the safety of their investments. The initiative is all the more attractive because it is backed by a government agency. But for the NSIA’s stamp of approval, pension fund managers might be a little bit wary. Government participation remains crucial to the success of any infrastructure project in Nigeria.
InfraCredit is only expected to become operational in the second quarter of 2017. However, a board is already in place, with chief executive Chinua Azubike appointed in January. “We have already developed a robust deal pipeline and are very optimistic of the opportunities the market presents for InfraCredit,” he declared shortly after his appointment.
Drop in the ocean
Senior industry players judge it likely that InfraCredit will be able to increase its capital base to $2bn, as there are indications development finance institutions may be invited to be equity participants. But would it be enough? According to pundits, Nigeria needs at least $30bn in annual investments to bridge its infrastructure gap. InfraCredit is therefore still a drop in the ocean and more such initiatives are definitely needed.
This begs the question of why Nigerian insurance companies have not seized such a big opportunity. There is as yet no local private infrastructure credit guarantee company. Ordinarily, the government comes in when the private sector falls short in such a way.
Wale Onaolapo, chief executive of Sovereign Trust Insurance between 2009 and 2015, acknowledges the opportunity but highlights the constraints on insurance companies in this regard. First, the specialist insurance service would not necessarily come under the purview of the industry’s regulator.
Under the current structure, monoline insurance companies would not be regulated by the regulators of the pension or insurance industry but by the Central Bank of Nigeria, finance ministry or the presidency. Second, he says that “life insurance companies that could have ventured into the [business] have been directed to transfer their annuity fund … to pension fund custodians, supervised and regulated by [the] National Pension Commission.” In any case, only a few of the country’s life insurance companies have a credit rating. And not a single one has a triple A rating.
No more excuses
Hitherto, the long-running excuse by pension fund managers for not investing in infrastructure assets was that the few instruments, poorly rated in any case, could be better packaged to make them fit for PFA exposure. So with the establishment of InfraCredit, a major hurdle has been overcome.
Some PFAs have begun to engage with it. “We have had a number of engagements with the NSIA, InfraCredit and GuarantCo in a bid to articulating an acceptable model of investing in the infrastructure space,” says Fajemisin of Stanbic IBTC Pensions Managers.
Still, although credit enhancements are somewhat critical for Nigerian infrastructure projects at this stage of the country’s development, projects must first be commercially viable and able to repay their commitments.
Besides, there is still a need for more attention to be paid to policy enhancement and harmonisation of the legal frameworks around infrastructure development. After all, financing structures and options are only but one of the myriad challenges facing infrastructure development in the country.