In partnership with InfraCredit, FSD Africa has put £10 million into the establishment of a risk-sharing facility that is the first of its type and is aimed to free up funds for environmentally responsible infrastructure development in Nigeria.
The facility will serve to accelerate Nigeria’s economic and social growth, as well as deliver on Nigeria’s climate targets, by boosting the accessibility of finance for “climate-aligned” infrastructure projects.
The objective of the Risk Sharing Backstop Facility (RSBF) is to encourage short-term and medium-term local institutional investment in climate-aligned infrastructure projects that have a reliable business model and are ready to expand but struggle with a higher perception of risk in the absence of this form of credit enhancement. These projects include those that are critically needed.
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Why Nigeria needs this support
Nigeria has a significant demand for investments in its infrastructure. The International Monetary Fund estimates that over the next 30 years, it will require a total of approximately three trillion United States dollars to pay its infrastructure deficit. Despite the fact that there is a huge amount of cash available in the regional market to support a significant chunk of this, relatively little is allocated towards infrastructure.
For instance, less than 2% of the assets held by pension funds are put towards investments in infrastructure. This is mostly due to the fact that administrators of pension funds have traditionally favoured investment vehicles that are more liquid and require less cognitive effort, such as government bonds. Research conducted by UNOPS, the United Nations Environment Programme, and the University of Oxford has found that infrastructure is responsible for around 79% of all greenhouse gas emissions.
The majority of these emissions are related to energy production, building construction, and transportation. Decarbonization is necessary, therefore, in order to prevent locking in high-emitting infrastructure for the foreseeable future, and it must be accomplished in a coordinated manner across all economic sectors, financial systems, and countries. However, there is a significant paucity of financing available for early stage projects, also known as “greenfield” projects. This is especially true for climate-aligned infrastructure projects, which are perceived to have a high level of risk linked to them.
It is too early for early-stage greenfield climate-aligned infrastructure ventures to start generating stable predictable cashflow and demonstrate their status as being long-term bankable. The RSBF will address this perception of high risk by providing backstop support to investors in addition to InfraCredit’s guarantees. This will allow early-stage greenfield climate-aligned infrastructure ventures that are at the construction stage and too early for additional capital to be secured via a bond issue more time to start doing so.
The existing pipeline highlights the depth and breadth of the projects that this facility will serve. These projects include distributed renewable energy services for urban households, commercial and industrial renewable projects, edge-certified green housing, and e-mobility infrastructure, to name just a few. All projects, regardless of whether or not they have submitted an application for funding, will have their environmental credentials thoroughly evaluated.
The impact of FSDAi and InfraCredit’s partnership
FSDAi is excited to be making this investment in conjunction with InfraCredit, an established participant in the field of sustainable infrastructure financing. InfraCredit is a company that has a market capitalization of US$209 million and a number of AAA ratings from various regional rating agencies. In point of fact, since its inception in 2017, InfraCredit has built an exemplary record of supporting strategic Nigerian infrastructure projects.
It has written 145 billion (approximately $315 million) of guarantees underwriting bond issuances by eleven companies distributed across the power, transportation & logistics, ICT/telecommunications, gas to power, LPG clean cooking and input to infrastructure sectors. In total, InfraCredit has provided support for a total of fourteen companies. All of these issues have received full subscriptions from domestic pension funds and insurance firms, with some of them exceeding 160% of the total amount.
The Financial Sector Deepening and Deregulation Authority (FSDAi), which has a total capital base of $131 million and receives funding from the United Kingdom’s Foreign, Commonwealth and Development Office (FCDO), has a proven track record of supporting innovative ideas and being willing to take calculated risks in order to fix the shortcomings of the financial system and foster long-term economic expansion.
Other investments include Persistent Energy, which is a leader and pioneer investor in the off-grid energy and e-mobility sectors in Sub-Saharan Africa; Nithio, which invests in renewable off-grid energy; and Nyala Venture, which is a fund designed to support African alternative capital providers targeting small and growing businesses, particularly those which are women-led or are applying a gender lens investment strategy.
The purpose of the FSDAi’s £10 million investment in the RSBF is to catalyse capital and steer it to landmark infrastructure projects that will assist in the creation of exponential economic, social, and environmental advantages for Nigeria. Because of this, the investment is in line with one of FSD Africa’s key goals, which is the development of capital markets through the elimination of bottlenecks in the system.
The facility has been meticulously created to provide assistance to environmentally responsible infrastructure projects that have a solid business model, are prepared for expansion, but do not have the financial resources necessary to do so. This postponement or postponement of expansion projects as a result of a lack of accessible funding creates a bottleneck that hinders Nigeria’s progress towards finding solutions for some of the country’s most pressing and transformative infrastructure requirements.
The RSBF intends to amass a total capital base of up to $50 million US Dollars, and it will do so by soliciting funds in stages, initially from the FSDAi and later on from other funders.
The potentials of the facilities
Anne-Marie, CIO of FSD Africa Investments, FSD Africa, said, “FSDAi’s partnership with InfraCredit on the a bridge-to-bond facility introduces a de risking financing solution to mobilize short and medium-term local institutional investment into critically needed infrastructure projects that are currently considered un-bankable without alternative credit enhancement.”
“Moreover, as Africa’s economies struggle to mobilise capital to develop key climate mitigation and sustainable power generation projects, this facility comes as a timely and much-needed intervention for Nigeria’s infrastructure landscape.’’
Chinua Azubike, CEO of InfraCredit said: “I am delighted to work with FSD Africa on an innovative facility which will support much needed but underfinanced projects realising their ultimate goals and purpose.”
“Smart use of catalytic capital can dramatically increase the role of private capital and local intermediaries in investing in Nigeria’s sustainable infrastructure space and help the country develop responses to the significant challenges which confront it from the deteriorating environment and ecology to an unstable energy mix and severe social inequality.”