IPO: Salvaging Nigeria’s burgeoning fiscal deficit and bridging the country’s growing infrastructural gap whilst ensuring shared-prosperity and equali

Background to Nigeria’s infrastructure deficit

?The dearth of infrastructure in Nigeria is so significant, that it sadly qualifies as a heritage of the country. In other words, the status quo of infrastructural deficit is now, more or less, part of the country's culture - as it has become one of what it is generally, and particularly, known with.

The connection between the level of infrastructural provision in a country with the peoples' prosperity & equality has everything to do together, all the way. This, beyond probability, explains why the infrastructural dearth in the country has impressively translated into people’s poverty and inequality.

Nigeria's budget of 2016 was proposed at N6.07 trillion with a capital expenditure put at 30%, and recurrent expenditure put at 70%, of the year's fiscal plan. This budget was laudable for being Nigeria's first and foremost, with an infrastructural spending allowance as high as 30%.The capital expenditure for that year was 18% higher than that of year before- 2015.

Fast forward to 2017, the budget was proposed at N7.3 trillion with an infrastructure spending allowance of 30.7%. Although this allowance is just minutely (0.7%) higher than the previous year's- (2016), its equivalent in amount is higher because of the over 20% increase in the total amount of the budget when compared to 2016's. The afore-stated breakdown of Nigeria’s infrastructural spending allowance is not in any way impressive, considering that the international benchmark for infrastructure stock as a percentage of GDP is 70 percent. Whereas, Nigeria’s infrastructural deficit is put at 300 billion dollars, representing 25 per cent of the nation’s Gross Domestic Product (GDP), according to the Minister of Finance, Mrs. Kemi Adeosun, on Tuesday, May 16th, in Abuja at the 10th African Finance Corporation Summit.

This, of course, partly but substantively explains why the country’s lowly ranked in the African Competitiveness Report by the World Economic Forum, which positioned Nigeria’s infrastructure at 134th,  out of 144 countries. In addition, the World Bank’s latest Ease of Doing Business Index ranked Nigeria 169th out of 189 countries.

The amount, in percentage, ear-marked for infrastructural spending does not in any way justify Nigeria’s infrastructural deficit, whether on inches or miles view. As a matter of fact, if Nigeria annually spends all of her total budget in each year on infrastructure, it still won't be close enough to salvage the country's infrastructural deficit in the nearest foreseeable future. And so, this issue is so much of a concern as none of CBN-Forex policy, currency exchange crisis, anti-corruption war or anti-terrorism war, is nearly as critical to infrastructural spending, in determining Nigeria’s economic future.

Available statistics on Nigeria's infrastructural deficit won't do us much good as they contradict themselves in figures. However, they all agree on the fundamentals that the infrastructural deficit in the country is tremendous and it would require enormous amount of capital, among other factors, to give the required and desired face-lift to the infrastructural shortfall in the country.

Although news keep making the rounds that the plan has since been dropped and dumped, The Ministry of National Planning Commission had in August 2013 announced a 30-year roadmap infrastructural development plan, known as the Integrated Infrastructure Master Plan (NIIMP). It projected that Nigeria required at least $2.911 trillion for infrastructural development over the next three decades. The plan is to raise the nation’s stock of infrastructure from the current 35% of Gross Domestic Product (GDP) to 70% of GDP by 2043. Accordingly, 48% of the proposed total sum would come from the private sector. In addition, the Federal Government would provide 29%, states and local governments would provide 23% and donor agencies, 0.4%.

According to another group of reports, Nigeria requires about $30 billion or N9.47 trillion annual investments to bridge infrastructural deficit in the economy. Regardless of the discrepancies in these figures, the truth is that the prolonged infancy and stunted growth of the nation’s infrastructure remains a growing concern with distant solution.

Why infrastructural deficit has remained an insolvable, irresolvable and in-salvable problem for the nation

The country's management team, from time, is aware that its infrastructure provision to cater for the magnitude of infrastructural dearth is disproportionate and irrational. Yet, they can’t help themselves out of the difficult fiscal situation they have found themselves. When the converse should have been what should be obtainable, we have a case of; capital expenditure put at 30%, and recurrent expenditure put at 70%.

Consequence of the structure of the country and its system of governance, it has become relatively impossible for the capital expenditure to be increased, while recurrent expenditure is decreased. Also, aside the numerous and long standing debts or loans the country needs to service, the country's system of government is one of the world's costliest - all of which add to the recurrent expenditure. To make matters worse, oil which is the nation's number one export - and in fact the nation's single largest source of revenue- has been challenged locally and globally. The challenged oil sector had resulted into exchange rate crisis and consequently affecting and multi-threatening the projected revenue-source on which the budget estimates have been drawn up. In other words, the estimates in the budget are at the risk of changing due to changes in exchange rates. So our budget estimation is like Relative Motion, as we were thought in physics, where the movement of one object determines that of another.

Current proposals and projects to combat infrastructural deficit that promotes unshared-prosperity and inequality

Many proposals to combat the infrastructure dilemma have been churned out. However, sadly, many are to no avail and the few that availed brewed and promoted unshared-prosperity and inequality. Other than the unshared prosperity which takes the lead, there has been what I have chosen to call two-pronged inequality. First, the investors who fund the infrastructural projects make staggering high profits that do not go round in the country. Secondly, the users of these infrastructures are exclusive by reason of imposed high user-fees, which cannot be afforded by many.

For instance, state roads and bridges like the Lekki Epe expressway and the Ikoyi-Lekki linked bridge are heavily tolled since investors -who also borrowed the funds they used to finance the road/bridge- quickly want to; recoup their share of capital, repay their loans with the interests on it, and also make profit before the assets reverts (if applicable) to the government. In this case, only the investors get rich while the consumers, particularly those who cannot afford the toll, get to pay against their will or are denied usage of the facilities. The same goes for the other government assets that have been privatized in various sectors like power, energy, road and air transportation, telecommunications and so on and so forth.

How suitable is PPP to Nigeria’s infrastructural deficit problem?

Almost all the infrastructural proposals have agreed that the government alone cannot address the country’s infrastructural deficits, even if it devotes the nation’s entire budget to infrastructural expenses. And so, Public Private Partnership (PPP) is chorused as the answer when it comes to questions concerned with the ways by which infrastructural gap can be bridged in the country. However, PPP has had its share of history with shortcomings as far as Nigeria is concerned. Notably, they are known to frequently steer government policy to suit their self-interests rather than the nation's overall interest. But, because it appears there are no alternatives, PPP keeps reoccurring as Nigeria's answer to infrastructural deficit. As such, the only thing that is being done is to figure out what went wrong with past PPPs and fix the ones that are fixable whilst also creating the framework that encourages investors to come in. Since the national economic management is more of government affairs than private, the truth is that government must seek alternatives and not continue to execute every infrastructural development through Public Private Partnership (PPP). This is of a necessity because the government must begin to address the issue of infrastructure from the point of social value rather than bankable projects.

The proposal

Background to the proposal

Even at the face of the inevitability of the very high recurrent expenditure in the country's fiscal, a proposal poised to increase the country's revenue well enough to; expand its infrastructural spending with the aim of providing the needed and desired facilities, whilst also promoting inclusivity through shared prosperity and equality is a major streak of this article. In a thrive to provide answers to Nigeria's burgeoning fiscal deficit, I have identified as the credible solution, the establishment of either state and private owned infrastructure financing and investment firms who raise capital and sustain their operations via funds gotten from public offerings whilst also paying their subscribers appropriate dividends.

Examples of infrastructures our country is in dire need of includes; toll roads, airports, broadcast towers, internet providing satellite, electrical grids, high-speed rail, seaports and waterways, freight rail, and public transit, state-of-the-art broadband, high-tech airport and school construction, pro-human space/earth exploration project, waste plants, research laboratories, mining projects, housing, agriculture, renewable energy plants and so on.

Just as the companies that provide them, these infrastructures generally have; monopoly characteristics, high revenue certainty, strong profitability, and long-life assets. In others words, infrastructural investments; are in monopolistic industries with steady demand, have regulated and often inflation-hedged revenues and, have appropriate leverage.

However, a few things may threaten or lock down the potentials of infrastructure and its financing in Nigeria. They vary from expertise of management team, to investment strategies, to interest rate demanded by fund providers or fund-providing schemes, to performance measurement indexes, to maintenance-ability of assets, to risk control and mitigation, to duration of investment/assets, to valuation approaches, to underdeveloped nature of our economy, characterized by predominant emerging markets, to global or local financial crisis, to various governmental factors like political and legal frame work, amongst others.

However, in order to unlock the potentials of infrastructure and its financing in Nigeria, an infrastructural agenda that is in cooperation with globalization must be put in place. Customized to our well-researched national needs, our infrastructural agenda must be drawn up and sustained by an anticipated holistic, comprehensive and long term vision of what the 21st century world is all about. Global investors and capitalist are attracted to, and confident with, infrastructural agenda that incorporates a fast-approaching technology-driven future.

Infrastructural  agendas, fashioned after this blueprint, will help the nation's management team to focus on the identification, prioritization, and provision of infrastructure that matters in the long run. Moreover, the infrastructures that matters in the long run are the ones capable of not only providing jobs for today but creating modern jobs that are sustainable for the present and next generation. They are the infrastructures that are capable of returning more money to the economy than what’s put into them, even despite reduced spending and increased inflation that is generally caused by strong forces that often dampens demand during the recession period. I am talking about infrastructures that will bring faster growth in the future, and would produce more income - therefore more revenue (tax) for the government.

?Bridging infrastructural gap: why Nigeria’s infrastructure industry is ripe for IPO Present investors are financially constrained : The government and the very meager number of companies or consortium who are in the business of financing and investing in the national or state infrastructures of the country are seriously financially constrained due to heavy bank loans they secure to raise capital and sustain their business operations. Initial Public Offering (IPO) can help raise capital to salvage the financial constraints, and also help the government with its recurrent expenditure whilst increasing its capital expenditure.

Financial crisis do favor new entrants of investors: Financial crisis, like the recession that Nigeria is slowly recovering from, do favor new entrants of investors. This is based on the fact that the investors find assets cheap to purchase, consequence of the recession-powered drop in price of the assets. In other words, because assets are undervalued by reason of economic meltdown, there is a significant drop in prices which translates into increased affordability- particularly for new investors. The values of these assets that seem to be under-water by reason of the present economic dearth do skyrocket upon the recovery of the economy in the nearest future. These new investors may have to depend on IPO to raise capital, since banks or most financial institutions loans can be difficult to secure, yet at killer rates.

However the contrarianism of increasing investment on the basis of lowered asset prices which are linked to economic crisis can cause funds to lag, but thorough research and focus on valuation mitigates such concerns. That is, investors are to be watchful about the kind of, and the prevailing condition in which they find, valuations of the assets they want to purchase attractive or preferred. A valuation approach of assets that is built on cash-flow-predictability generally gives investors strong conviction.

In corollary, correct valuation approach takes cognizance of long-term view for today’s low-priced/valued assets to develop a fair value/price in future. Moreover, in a strive to build stocks of infrastructure or assets portfolio that strictly offers an expected return greater than inflation, assets are ranked based on the difference between their fair value (to be developed after a long term ) and their current (cheap) price.

Financial crisis demands that affected countries must spend their way out of it: Historically, financial crisis like recession demands that economies must spend their way out of it. Infrastructure, generally, consumes the chunk of any economy's spending. In 1930, the year of the great depression, the Keynesian spending ideology became predominant. John Maynard Keynes, although attaching bulk of responsibility to the government, spearheaded a revolutionary economic theory that encourages spending to combat the reduced spending that has been caused by strong forces that often dampened demand during the recession year. 

 Accordingly, the economist believes that increased spending during recession year would jump-start production & employment, whilst also increasing output. The basis of the Keynesian thinking is the assertion that aggregate demand measures as the sum of all spending. That is, spending by households, businesses, and the government, equals aggregate demand. Demand, in itself is the most important driving force in an economy because when it is met at the right quality and quantity, it translates into increased output/GDP. And so, this is why the increased government spending during recession is of a necessity as it often have the capacity, over others, to spend magnanimously enough to affect demand and consequently, output.

Drawing down, without capital there cannot be any money to spend. And without spending, there cannot be recovery out of recession. IPO would be a means to leverage and catalyze capital for increased government and investors spending, which will further translate into the recovery of the economy.

Reduced oil price and exchange rate crisis: Consequences upon the fact that; our economy is predominantly(over 70%) powered by revenues gotten from oil export, and crisis of the low & dwindling price facing the oil industry nationally and globally , we are at a time when it is evidently safe to say we are facing commodity shocks. The oil sector crisis has resulted in exchange rate crisis which, from a perspective, may be seen in the of form currency shock. As such, investors taking foreign denomination facility to finance facilities domestically are at a kind of credit risk, particularly if expected revenues are domestically denominated. In the events of shocks, however overwhelming, there will be weaknesses in the ability of the obligor to be able to repay the facility. But with IPO, funds can be innovatively sourced locally to finance assets locally thereby doubly eliminating or reducing credit risk.

Insufficient GDP: The Infrastructure Concession Regulatory Commission said recently that the country losses two percent of its GDP yearly due to inadequate infrastructure. The country’s nominal GDP is N101.59 trillion and two percent of that figure gives N2.03 trillion. In the same vein, speaker of the House of Representatives recently said the country was losing a trillion naira annually due to bad roads in the country- a statistic which figure is evidently conservative and highly undervalued. If the country losses N2.03 trillion yearly due to inadequate infrastructure and N1 trillion is attributed to road alone, imagine the loss in trillions of dollars resulting from the inadequacy of other infrastructure sector like energy, power, transportation, tele-communication, internet-communication, agriculture and several other sectors.

In corollary, the acting Director General, Infrastructure Concession Regulatory Commission (ICRC), Mr. Chidi Izuwa has recently estimated that over the next six years, about $60 billion would be required for the oil and gas sector; about $20 billion to revamp the power sector; $14 billion for road; and between $8 and $17 billion for rail tracks. Based on the premise that infrastructure gives back to the economy than what is put into providing them, it goes to say that the country losing out multiple times more than the theses estimated figures.

Imagine losing immeasurable amount of money during recession when we should actually do all that is possible to raise and make money to recover from recession! It's like someone who is in dire need of blood to live yet seriously losing blood. What is the person's chance of staying alive? This loss can be stopped via the use of IPO to raise capital and sustain business operations.

How IPO solves Nigeria's fiscal deficit and infrastructural gap suiting the nation's overall interest:

IPO would widen equity ownership and encourage the active participation of ordinary citizens in the wealth creation process, thereby translating to shared prosperity and equality. Compared to Public Private Partnership (PPP), IPO pushes government to see and handle the issue of infrastructure from the point of social value rather than a bankable project. That is, it makes the government behave more socially- than economically- in its thrive to provide needed public infrastructure.

Also, the listing of stocks of state or private infrastructure would deepen/develop Nigerian capital markets that have been forlorn and shallow. It equally would stimulate, into creation and participation, other states and private owned infrastructural financing companies who may want to operate via IPO. It would trigger, in the markets, the optimal representation of infrastructural-linked sectors that have always been under-represented due to the paucity of IPO. It will rev up markets or industries that are still emerging. Bottom line, it will significantly raise the capitalization of the stock market currently estimated at above N9 trillion.

What must be done to encourage IPO?

Generally, the government must continually do all it can to attract investors and secure their trust by; increasing fiscal stimulus, providing long-term low-interest financing for projects, correctly evaluating expected returns on projects, making assets profitable, making suitable market conditions in commercial and legal terms , honoring validly executed contracts, developing a concentrated portfolio that is inclusive i.e. encompassing enough industries and regions of the nation to promote shared prosperity and equality.

Furthermore, the Nigerian Stock Exchange must provide a legislation that covers incentives, unbundling of stringent eligibility requirements that create high barriers for potential entrants and hinder participation by willing businesses, adopting options that promote foreign investment in the economy under terms that support national interest without exposing the market to the dangers or pitfalls of the past, present or future.

If investors cannot avoid, especially due to its inevitability,  infrastructural investment space that are exposed to commodity prices, government must try as much as possible to create an 'ozone layer' for their investments to be protected and preserved. In the same vein, government must create enough cushioning for dollar denominated investment which has created credit risk for African countries especially Nigeria. In other words, government must talk about how to structure domestically denominated facilities so that currency shocks do not impact repayment and performance of the facilities. One of the ways that has been pursued to mitigate against these shocks is the raising of Naira bond and facilities and the deployment of them into infrastructural projects by some development finance institutions like the African Finance Corporation.

Conclusion

In conclusion, there is no gain-saying that public offerings of state infrastructural projects is in the overall interest of the Nigerian economy i.e. the government, investors and the people - a win win . And so there is no point dilly dallying on going forward with selling stock of infrastructure and their financing companies, especially considering that the move is long-overdue and the market has since anticipated it. IPO is definitely the way Nigeria must go so that it can leverage and apply its unique capabilities to provide innovative financing and creative solutions to its complex and unique infrastructural deficit and fiscal tightening. Finally, government must ensure that IPO- powered assets or asset companies, irrespective of the strong business-unfavorable forces heralded with the nation's underdeveloped economy, live up to their characteristics of; monopolistic industries with steady demand, high revenue certainty in spite inflation, strong profitability, leverage-ability and longevity of assets.