Thought leadership from our experts

Financing Rail Infrastructure in Nigeria – Future Outlook

, Banwo & Ighodalo, Nigeria Ayodele Adeyemi-Faboya, Banwo & Ighodalo, Nigeria

Introduction

The critical need to develop Nigeria's rail infrastructure has been a burning issue over the last 30 years. The topography of Nigeria as well as the structure of its economy necessitate an efficient and sustainable rail infrastructure; yet since the decline and obsolecy of the rail infrastructure built during the colonial era, the Nigerian Railway Corporation has been largely moribund and ineffective, existing mainly as a property leasing agency in respect of the landed property owned by the corporation. Since the mid1980s, successive governments in Nigeria have paid scant attention to infrastructure development either by direct investment or by creating an environment or law that encourage private sector participation in infrastructural development. The narrative has only recently begun to change with the construction and commencement of operations of the Abuja Light Rail, the Abuja – Kaduna Rail and the Lagos – Ibadan Rail. Funding however continues to be a critical challenge to the development of Nigeria's rail infrastructure, with even the lines which have commenced service being significantly de-scoped to save on cost and suffering significant completion delays due to funding.

Completed, Ongoing and Proposed Railway Projects in Nigeria, in the Last Five Years

A review of all the railway projects above show that all are (or will be) substantially funded through external borrowings. This funding structure is not sustainable to finance the vast rail infrastructure which Nigeria needs to build to support its growth plan.

Last year alone, the senate approved nearly $23 billion in foreign loans for infrastructure projects. As at 31st December 2020, Nigeria's public debt stood in excess of $86 billion with 38% of this sum being external debt. The government cannot continue to borrow the large sums of money required to finance rail (or other) infrastructure, particularly where the projected revenues do not support repayment.

Additionally, over-exposure to foreign loans exposes the projects to exchange rate risks, since project revenues are in Naira, invariably leading to defaults, extended tenors and abandoned projects. A look at the commencement / completion timelines for most of the projects clearly shows a trend of delays, largely attributable to funding. Such delays typically lead to cost overruns and thus set up a cycle of failure invariably ending in abandonment or significant de-scoping of the project.

Private Financing of Railway Projects – a Viable Option?

Private capital available to traditional private equity, infrastructure and pension funds is significant, with assets under management of pension funds alone, standing in excess of NGN 12.2 trillion as at November 2020. Admittedly, there has been an increase in deployment of such capital to infrastructure projects in the last few years, particularly following the updates to the investment guidelines for pension fund managers. (Such capital is however largely focused on projects such as real estate and power, due to demand and turnaround time). The capital available to be matched with "suitable" projects is significant, and it is worth exploring how the rail sector can benefit.

Challenges of Private Financing of Railway Projects

Disproportionate Risk and Returns

Private financing of infrastructure projects is relatively straightforward where the revenues and cash flows are expected to adequately repay financing and associated costs. This explains why private funding of power infrastructure projects has been so successful in recent years once a credible offtaker is identified. The private sector ultimately invests in these projects to make a profit (which is expected to be higher, where higher risks are associated with the investment). The challenge with rail projects is that by their nature, they are considered to be more of social impact investments. Rail fares are almost always subsidized to compete with other modes of transport and the revenue returns seldom compensate for the risks involved.

Cherry Picking

Flowing from the focus on matching risks to returns, project precedence has shown that where private funds are involved in transport infrastructure projects, there is a tendency for sponsors to cherry pick, and cover the more lucrative routes; leaving the government to finance infrastructure on the less lucrative routes. This then leads to issues of sustainability and integration, with the government, more often than not, unable to efficiently complete, at value, the rest of the infrastructure.

Rail Line Cost (US$) Funding Model Description
Abuja – Kaduna $876million 500 million in loans from the Exim Bank of China; balance funded by the Federal Government of Nigeria (FGN). 187km from Abuja to Kaduna (part of the 2,700km Lagos – Kano line).
Lagos – Ibadan $2.53 billion Loan from the Export-Import (Exim) Bank of China. 156 km from Lagos to Ibadan (part of the 2,700km Lagos – Kano line).
Ibadan – Kano $5.3 billion FGN to provide an equity stake of 15% with the remaining 75% funded by from China’s Exim Bank. Comprised of 4 sections - the 200km Ibadan-Ilorin section, the Ilorin-Minna section a distance of 270km and then the Abuja, Kaduna and finally Kano a distance of 300km. (part of the 2,700km Lagos – Kano line).
Abuja – Warri $3.9billion FGN to provide an equity stake of 15%, China Railway Construction Corporation Limited (CRCC), an equity stake of 10%, and the remaining 75% borrowed from China’s Exim Bank. The CRCC will operate the railway and the port to recover its investment. Originally commenced as the Itakpe – Ajaokuta cargo line in 1987, it was extended to link the capital Abuja to the port city of Warri, a distance by air of approximately 440km.
Kano-Maradi $1.959 billion To be financed by bilateral loan arrangements. To link Kano–Danbatta–Kazaure–Daura–Mashi– Katsina–Jibiya–Maradi (Niger Republic) with a branch line from Kano to Dutse.
Lagos-Calabar The project is valued at $11bn Originally intended to be funded from loans from China’s Exim Bank; however following indications that the funding is not available and continuous delays to the commencement of the project (which was expected to be completed in 2018), the FGN is currently exploring other funding options. 1402 km (871 mi) to be developed in two phases. The first phase will run between Calabar and Port Harcourt; while the second phase will run between Port Harcourt and Lagos via Onitsha.
Port Harcourt-Maiduguri $3 billion FGN to provide about 15% of the $3 billion rehabilitation and reconstruction cost, while the balance will be provided by a syndicate of Chinese financiers. Rehabilitation and reconstruction of the 1,443-kilometer (897-mile) Eastern Railway line that starts from the southeastern oil hub of Port Harcourt and terminates at the northeastern city of Maiduguri.

Integration of National Infrastructure

Another issue is the challenge of integrating the national railway infrastructure where various portions are privately financed by different entities. Generally, the sponsorship and financing of a complete national rail infrastructure is unattractive to private funders who do not have the capacity or appetite for such projects, occasioning a mix of financing options, and therefore competing interests on various portions of the infrastructure.

Security

Furthermore, the fragmented nature of the interests in the assets will create issues in relation to security over the said assets. The extent to which a private financier can have recourse to assets if a project fails is also a material consideration. Fixed rail infrastructure such as tracks are immoveable assets and have limited resale value outside the rest of the infrastructure, whilst the civil works such as tunnels have no resale value. Other than perhaps the project land (where substantial portions are located in urban areas, which is not typically the case in Nigeria); the viability of the project assets as security is therefore dependent on the financier being able to sell the entire project. Even where joint security arrangements are entered into and parties agree to sell, this will only be feasible if the project as a whole was economically viable in the first instance. Recourse must therefore be made to sovereign guarantees, or bank guarantees/ insurance (which then make the project prohibitively expensive).

It is therefore more typical for private investors to invest in rail assets such as rolling stock (over which security can be more easily taken), rather than the railway infrastructure.

Revisiting the PPP Model – InfraCo

Private financing on its own, cannot be viable for rail infrastructure projects where there is a funding gap i.e the project revenues cannot effectively carry the project cost over a reasonable project life cycle. The financing of railway infrastructure can therefore not be done in isolation of public sector funding or support in the form of subsidies, grants, sovereign guarantees, waivers, tax exemptions or government borrowings or a mix of all or some of such support.

The proposed Infrastructure Company of Nigeria Limited ("InfraCo") when established, properly structured and efficiently resourced, can create a viable midpoint between public funding and private finance for major infrastructure projects in Nigeria, including future rail projects.

InfraCo will be established by the FGN to replicate Infraco Asia (on a domestic scale), and focus on critical infrastructure investments. It will be a dedicated privately-managed infrastructure and industrial vehicle that will harness opportunities for Nigeria's infrastructure development by originating, structuring, executing and managing end-to-end bankable projects in that space. Its Initial seed capital of NGN1 trillion is expected to come from the Central Bank of Nigeria ("CBN"), the Nigerian Sovereign Investment Authority ("NSIA"), and the Africa Finance Corporation ("AFC") (identified as the promoters). (The President has also intimated that part of the seed capital is expected to come from pension fund assets; there has however been significant push back in this regard, and it is unclear whether pension funds will still be required to provide seed capital).The company is expected to grow to NGN15 trillion in assets and capital over time (raising capital from local and foreign private sector development financiers and markets), which will be managed by an experienced and reputable asset management firm. The firm will also be responsible for capital raising, and revenue generation. The board of the company will be chaired by the CBN Governor, and will include the MD of NSIA, President of AFC, representatives of Nigerian Governors Forum and Ministry of Finance, and three independent directors from the private sector.

Viability – Can InfraCo really be the Catalyst for Future Rail Infrastructure Financing

Nigeria has previously explored and failed with the PPP Model of financing infrastructure. For instance, the Abuja Light Rail Project was initiated in 1997 under a PPP Model. Following years of delay due to funding issues, the Project was re-awarded to China Civil Engineering Construction Corporation at a cost of $824 million, with 60% of the cost funded by foreign loans. As at today, only the first phase – line between the city center and the airport with no stops in between, has been commissioned.

The challenges of misalignment of interests, political risk, policy reversals, bureaucracy and challenging and unstable regulatory environment caused private capital to shy away from infrastructure projects, under the PPP regime. All of these problems still exist. How do we assure a clear and certain statutory and regulatory framework? How do we ensure transparency, appropriate governance, non-interference by government and first-class management selected on merit? How do we confirm an attractive and viable security structure? How do the promoters of InfraCo intend to ensure sufficiency of capital, capacity for efficient project completion, and sustainable returns on investment? There must be a clear plan for a systemic shift to resolve historical challenges.

In addition, there must also be a strategy to close the funding gap created between the pillars of commercial viability and impact development. Moodys has predicted that Nigeria will need to invest at least $3 trillion over the next 30 years to close the country's infrastructure gap. A well structured, well funded and efficiently managed InfraCo established and empowered under the right statutory and regulatory framework can catalyse infrastructure development in Nigeria and possible attract part of the $17trillion negative interest yielding funds sterilized in the international capital markets.

Conclusion

There will be tremendous pressure on InfraCo and competing interests for its resources. Accordingly, its contributions to the financing of raill projects may be focused on rolling stock, ticketing and operations, as well as other more commercially viable infrastructure, and thereby free up Government borrowing for core rail infrastructure.

In order for rail projects to attract private sector investors, the way in which such projects are developed must change; incorporating/ integrating wider strategic goals on a whole city level- and thus ensuring that people will want to use the service, it will have a positive social impact and it can be funded and operate sustainably. For instance, the success of many European rail models lies in the active involvement of the operator with businesses that are not directly connected to transport. The right planning of shops and offices within and around stations will contribute to increasing the revenue that can be extracted not just from the rail users, but people living and passing through surrounding areas and will help make the project more commercially viable. Until then, Nigeria's fledgling rail reform, will likely continue to be dependent on government borrowing.