Investing in Infrastructure to Spur Development in Nigeria
A previous version of this article appeared on the INVEST Medium page in July 2023. Read it here.
With booming population growth, Nigeria faces difficulties in developing and maintaining renewable energy infrastructure. Power Africa, along with USAID Nigeria and Prosper Africa, partnered with Chapel Hill Denham to increase the amount of private capital flowing into critical infrastructure, strengthening the capacity of Nigerian institutional investors like pension funds to invest in priority sectors. Over 26 months, the activity closed five transactions for over $488 million, including $63 million for renewable energy.
Infrastructure development in Africa is a key condition to overcoming climate threats and pulling communities out of poverty. To reach the 600 million Africans who currently lack access to power, a massive effort to build and expand energy generation, transmission, and distribution infrastructure is needed. The African Development Bank estimates an infrastructure financing gap of $68–108 billion per year across all sectors, far beyond what governments can finance on their own.
Today, the Government of Nigeria faces difficulties in developing and maintaining critical infrastructure, especially given declining tax revenue from oil. The country’s total infrastructure stock amounts to only 30% of its gross domestic product, far below the international benchmark of 70%. Bridging this infrastructure deficit would require an estimated USD $3 trillion in investment.
Institutional investors — entities that pool, manage, and invest capital on behalf of other people or organizations, such as pension funds, investment funds, insurance companies, and foundations — are an important source of private capital to help fill this gap. Developing infrastructure is capital intensive and takes time, making the long-term, patient capital from institutional investors a good match for potential financing. And their pockets are deep; the Nigerian pension community alone controls assets worth over USD $20 billion (16 trillion Nigerian naira).
Investors have both available funds and an appetite for greater investment in infrastructure assets with reliable, predictable cash flows, but are constrained by a lack of familiarity with existing investment opportunities, as well as an overall dearth of investible products in Nigeria. Indeed, developing infrastructure projects is time-intensive for project sponsors and requires raising early-stage risk capital to reach financial close.
Infrastructure for development
To address these challenges, Power Africa worked with USAID Nigeria and Prosper Africa to increase the amount of local private capital flowing into critical infrastructure in Nigeria. Ultimately, these investments in the agricultural, water and sanitation services, and renewable energy sectors will boost economic development, increase access to power and sustainable water and hygiene services, and strengthen food security.
Through the INVEST initiative, USAID partnered with Chapel Hill Denham, one of Nigeria’s leading independent investment banking, management, and advisory firms. Leveraging Chapel Hill Denham’s strong relationships with the various investor groups in Nigeria, USAID aimed to strengthen the capacity of Nigerian institutional investors — and specifically the pension community — to invest in priority infrastructure sectors, raise awareness around opportunities, and facilitate discrete transactions.
Why invest in infrastructure
Solid infrastructure is imperative for sustainable development. As the Brookings Institution has noted, “Infrastructure enables trade, powers businesses, connects workers to their jobs, creates opportunities for struggling communities, and protects the nation from an increasingly unpredictable natural environment.” It facilitates economic growth by providing jobs and supporting workers, maintaining supply chains, and even reducing inequality. It can also have a multiplier effect, meaning there is a “measurable economic impact for each dollar of government spending,” according to the World Bank.
“Investing in infrastructure is investing in development…. The government, pension funds, banks, and others must play the role of catalysts,” Chapel Hill Denham CEO Bolaji Balogun.
In addition to the societal benefits, this work is helping make the economic case for investing in infrastructure:
- Infrastructure assets have intrinsic value. Infrastructure provides essential services to society. It also stores value through the economic cycle, due in part to the significant capital expenditure required to build and maintain these assets.
- The return drivers for infrastructure are unique. They are generally not subject to the volatility of capital markets, and are derived from overall asset performance, not by the market.
- Infrastructure assets have low correlations to other asset classes. Because of their unique drivers, infrastructure asset returns don’t generally follow other publicly traded equity or debt markets. For example, they have demonstrated substantially lower loss ratios over the last fifty years, compared to corporate debt, leading to greater returns.
- Infrastructure investments have low volatility. The services provided are generally subject to regulations, concession arrangements, or contractual agreements. This means that private market infrastructure investments tend to perform relatively well throughout the economic cycle.
- They are protected from inflation. Many infrastructure assets have some form of innate linkage to inflation, either from contractual clauses governing revenue, or from the regulatory frameworks. This allows for their performance to be measured on an absolute return basis.
In sum, all of these factors mean that infrastructure assets can deliver real returns to investors.
Results after two years of raising capital
A diverse set of investees received transaction advisory services through this activity, with two, in particular, focused on raising capital to expand renewable energy infrastructure.
d.light is a manufacturer and provider of solar energy products designed for low-income and unbanked households that allows customers to pay for solar products in affordable installments. The transaction catalyzed innovation in the renewable energy sector by driving sustainable development and empowering communities.
- Amount raised: N10 billion ($12.98 million)
- Type: Debt
- Intended use: Scale its mobile PayGo technology and expand its distribution network across Nigeria to serve those not yet in service areas.
ETAFA is a financing facility launched jointly by the Global Energy Alliance for People and Planet (GEAPP) and Chapel Hill Denham to mobilize $50 million (in local currency equivalent) to finance decentralized renewable energy projects.
- Amount raised: $50 million
- Type: Debt
- Intended use: Contribute towards making distributed renewable energy (DRE) solutions more affordable, particularly for lower income consumers in Nigeria. DRE is acknowledged to be the fastest and most cost-effective solution to accelerate clean electricity access to the African continent.
An important feature of these deals was that the capital was raised from domestic institutional investors in local currency. Infrastructure projects funded in foreign currencies can face mismatches between revenues and debt obligations, leading to substantial foreign exchange risks that may threaten their long-term viability. Further, by financing infrastructure development with national savings, a country can boost its economic self-reliance and reduce its dependence on external funding. In a country with a robust pension system like Nigeria, raising capital domestically was a huge advantage for these organizations.
In the words of Bolagun, “A prosperous Nigeria and Africa can feed the world, resource the world, and reverse migration. The foundation for delivering this outcome is in accelerating the rate of investment into low carbon, resilient infrastructure across Nigeria and Africa.”
By Natalie Alm, Communications Advisor; Charlotte Davidsen, Senior Activity Manager; and Dipika Chawla, Strategic Investment Advisor, USAID INVEST
