To address the above concerns and mitigate the risks to Nigeria when guarantee instruments are issued to support PPP projects, we put forward the concept of an Asset Trust Structure to mitigate government risks when issuing guarantees. We propose a National Infrastructure Asset Trust Programme (NIATP) by the Federal Government to finance specific PPP infrastructure projects.
A friend once said that besides economic recession, Nigeria is also facing mental recession i.e. lack of creative or innovative economic and developmental ideas. I agree. However, Nigeria has actually been in mental recession for decades, even before we entered into economic recession.
But I believe its about to change now with the economic recession. History has shown that in times of economic recession, that’s when creative and innovative financial thinking of governments and its citizens become galvanised. In the wake of the Great Depression of the 1930s, the United States Government became creative and innovative by developing all sorts of structures and programmes to get Americans back to work. The Asian crisis in 1997 brought the best out of countries like Malaysia, and other South East Asian countries. The financial crisis of 2008 again saw the American government being creative and innovative by developing the Troubled Asset Relief Programme (TARP) and other programmes to get the American economy revving again.
Thus, my optimism that the present economic recession is the turning point to get us out of our mental recession.
Asset Sale Vs. National Borrowing
Many so-called experts and public commentators have put forward a number of great ideas and essays on how to get us out of economic recession. Every single one of these ideas and essays focus on increased spending on infrastructure development as a key step to financing our way out of recession. However, where these ideas differ is how to finance our infrastructure deficit.
Recently, Aliko Dangote unwillingly stirred the hornet’s nest by strongly suggesting the sale of some of our national asset to raise funds to develop our infrastructure. This suggestion triggered a national debate, which continues today. No matter the side of the divide you are on, an asset sale programme still remains one way to finance our infrastructure deficit.
The Federal Government on its own, figures we’re better off borrowing to finance our infrastructure deficit, and has proposed a massive US$30 billion borrowing plan over a three-year period. The bulk of the borrowing will be used to finance its infrastructure development plans in the power sector, transport sector and other important sectors of the economy. Again, this request has triggered an intense national debate, particularly following the Senate’s initial rejection of the plan due to “technical reasons”. In equal numbers, we have proponents for and against the FG’s borrowing plan. Once again, no matter which side of the divide you’re on, borrowing to finance our infrastructure deficit still remains one way, and potentially faster than an asset sale process, to financing our infrastructure deficit.
There is really no need to go into much detail of the massive infrastructure deficit we face in Nigeria. You certainly don’t need the World Bank or the African Development Bank to provide you with statistics of of this. We live it everyday. It’s how to go about funding this massive deficit that “experts” and social commentators differ on.
Adopting PPP Structures to Finance Our Infrastructure Deficit
One way of financing our infrastructure deficit is by adopting proven project finance structures such as Public-Private Partnerships (PPP). The first requirement for financing infrastructure using the PPP model is that such infrastructure must be able to generate revenues sufficient to pay back the financing and potentially generate a reasonable rate of return for the project sponsors. Thus not all infrastructures, no matter how critical, will and can be financed under the PPP model. It is important that we make this point early on.
Under the National Infrastructure Asset Trust Programme, we propose that the Federal government create a Trust over several national assets (“Trust Assets”) against which guarantees, either in the form of PCOA, Letter of Support, or other forms of guarantees, will be assigned to PPP infrastructure projects to enable such infrastructure projects reach timely financial close.
The Project Finance/PPP model is particularly helpful to public sector balance sheet management. It saves the government the need to either borrow fiscally, or set aside capital/budgetary appropriations to finance much needed infrastructure projects. The Project Sponsor, typically a private sector operator, is wholly responsible for securing financing for the projects. However, a key requirement for PPPs is the assurance of revenues and/or some form of government support to attract both debt and equity required by the private sector project sponsor to finance the infrastructure project.
In PPP projects, Sponsors typically encounter a number of issues when attempting to secure project financing from lenders. Lenders traditionally require additional security for loans, against potential government default, project termination and/or other macro-economic risks and uncertainties that may affect the project. In addition, Lenders may require government to provide some form of security against credit risks arising from revenue defaults in instances where the government is the direct off-taker for the project.
The most accepted form of government support for PPP projects required by Lenders and Project Sponsors are sovereign guarantees. A sovereign guarantee is issued by a government of a country, and represents a government’s guarantee that a loan obligation will be satisfied if the primary obligor defaults.
Traditional sovereign guarantees are contingent debt obligations on the government and are quite broad. Sovereign guarantees provide the means to a claim by Lenders and Project Sponsor(s) against any asset of the Federal Government sufficient to repay government’s obligations under the terms of the project financing documentation, should there be a default. Traditional sovereign guarantees are considered an over-collateralisation of project loans, which can have dire effects on a country’s debt portfolio should there be a default on the underlying project loans. Some of Nigeria’s debts to the Paris Club were from sovereign guarantees issued by past governments to guarantee loans and projects, which then crystallised as a result of loan and project defaults, and became actual sovereign debt on our national balance sheet. I suspect a key part of the US$30billion borrowing requested by the Buhari Administration are in the form of traditional sovereign guarantees.
Due to the very broad nature and balance sheet risks associated with traditional sovereign guarantees, Nigeria and a number of African countries are wont not to provide sovereign guarantees to Lenders, except where it is of utmost necessity. Rather, countries have sought to provide guarantees for projects by means of other instruments and/or mechanisms that do not have the same balance sheet impact as traditional sovereign guarantees, or which offers the government some protection as well from the project sponsor’s default. Some instruments/guarantee mechanisms recently developed and increasingly becoming popular in use are the Put Call Option Agreement (PCOA), Partial Risk Guarantees (PRG), Letters of Support, Letters of Credit, credit insurance, and other credit support instruments. To be precise, these instruments are actually variants of sovereign guarantees as they have some form of sovereign balance sheet impact. However, the attraction is that the instruments are project specific and are more tailored towards the risks of the project. These instruments also specify the instances of default when Lenders can call the instruments. Recently, the Ghanaian Government announced that it would stop issuing sovereign guarantees to Investors who wanted to build independent power projects (IPP) in Ghana and would now issue Put Call Option Agreements (PCOA) to these investors.
However, if PCOAs or similar guarantee instruments/mechanism are not properly structured, Lenders can still have a broad claim against government asset and revenues, which they can go after in the event of a project default. Asset like our foreign reserves held by the CBN and in foreign bank accounts, NNPC assets, even the FIRS, and other revenue generating assets are typically asset, which Lenders and Project Sponsors will claim against. There are no limits to what Lenders can claim from the country should they secure judgment debts against the country arising from these instruments.
Using an Asset Trust Structure to Support PPP Infrastructure Projects
To address the above concerns and mitigate the risks to Nigeria when guarantee instruments are issued to support PPP projects, we put forward the concept of an Asset Trust Structure to mitigate government risks when issuing guarantees. We propose a National Infrastructure Asset Trust Programme (NIATP) by the Federal Government to finance specific PPP infrastructure projects.
Under the National Infrastructure Asset Trust Programme, we propose that the Federal government create a Trust over several national assets (“Trust Assets”) against which guarantees, either in the form of PCOA, Letter of Support, or other forms of guarantees, will be assigned to PPP infrastructure projects to enable such infrastructure projects reach timely financial close.
Odion Omonfoman, a former Investment banker and an energy consultant, can be reached on orionomon@outlook.com.
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